[Senate Hearing 112-504]
[From the U.S. Government Publishing Office]
S. Hrg. 112-504
INVESTIGATIVE HEARING ON
THE MF GLOBAL BANKRUPTCY
=======================================================================
HEARING
before the
COMMITTEE ON AGRICULTURE,
NUTRITION AND FORESTRY
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
DECEMBER 13, 2011
__________
Printed for the use of the
Committee on Agriculture, Nutrition and Forestry
Available via the World Wide Web: http://www.fdsys.gov/
_____
U.S. GOVERNMENT PRINTING OFFICE
75-117 PDF WASHINGTON : 2012
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY
DEBBIE STABENOW, Michigan, Chairwoman
PATRICK J. LEAHY, Vermont PAT ROBERTS, Kansas
TOM HARKIN, Iowa RICHARD G. LUGAR, Indiana
KENT CONRAD, North Dakota THAD COCHRAN, Mississippi
MAX BAUCUS, Montana MITCH McCONNELL, Kentucky
E. BENJAMIN NELSON, Nebraska SAXBY CHAMBLISS, Georgia
SHERROD BROWN, Ohio MIKE JOHANNS, Nebraska
ROBERT P. CASEY, Jr., Pennsylvania JOHN BOOZMAN, Arkansas
AMY KLOBUCHAR, Minnesota CHARLES E. GRASSLEY, Iowa
MICHAEL BENNET, Colorado JOHN THUNE, South Dakota
KIRSTEN GILLIBRAND, New York JOHN HOEVEN, North Dakota
Christopher J. Adamo, Majority Staff Director
Jonathan W. Coppess, Majority Chief Counsel
Jessica L. Williams, Chief Clerk
Michael J. Seyfert, Minority Staff Director
Anne C. Hazlett, Minority Chief Counsel
(ii)
C O N T E N T S
----------
Page
Hearing(s):
Investigative Hearing on the MF Global Bankruptcy................ 1
----------
Tuesday, December 13, 2011
STATEMENTS PRESENTED BY SENATORS
Stabenow, Hon. Debbie, U.S. Senator from the State of Michigan,
Chairwoman, Committee on Agriculture, Nutrition and Forestry... 1
Roberts, Hon. Pat, U.S. Senator from the State of Kansas......... 2
Panel I
Blew, C.J., Farmer/Rancher; Chairman of the Board, Mid Kansas
Cooperative Association; Director, Board of CHS, Inc.;
Hutchison, KS.................................................. 9
Hainline, Jeffrey W., President, Advanced Trading, Inc.,
Bloomington, IL................................................ 6
Hupfer, Roger, Grain Elevator Operator, Freeland Bean & Grain,
Inc., Freeland, MI............................................. 5
Tofteland, Dean, Farmer, Luverne, MN............................. 8
Panel II
Abelow, Bradley, President and Chief Operating Officer, MF Global
Holdings Ltd., New York, NY.................................... 34
Corzine, Hon. Jon S., Former Chairman and Chief Executive
Officer, MF Global Holdings Ltd., New York, NY................. 33
Steenkamp, Henri, Chief Financial Officer, MF Global Holdings
Ltd., New York, NY............................................. 36
Panel III
Duffy, Terrence, Executive Chairman, CME Group, Chicago, IL...... 77
Giddens, James W., Trustee, Securities Investor Protection Act
liquidation of MF Global, Inc., New York, NY................... 75
Sommers, Hon. Jill, Commissioner, Commodity Futures Trading
Commission, Washington, DC..................................... 73
----------
APPENDIX
Prepared Statements:
Abelow, Bradley.............................................. 96
Blew, C.J.................................................... 99
Corzine, Hon. Jon S.......................................... 101
Duffy, Terrence.............................................. 123
Giddens, James W............................................. 128
Hainline, Jeffrey W.......................................... 134
Hupfer, Roger................................................ 137
Sommers, Hon. Jill........................................... 139
Steenkamp, Henri............................................. 151
Tofteland, Dean.............................................. 159
Question and Answer:
Stabenow, Hon. Debbie:
Written questions to Hon. Jill Sommers....................... 179
Roberts, Hon. Pat:
Written questions to Terrence Duffy.......................... 172
Written questions to Henri Steenkamp......................... 181
Written questions to Hon. Jill Sommers....................... 180
Written questions to Bradley Abelow.......................... 166
Baucus, Hon. Max:
Written questions to Hon. Jon S. Corzine..................... 170
Written questions to Henri Steenkamp......................... 181
Boozman, Hon. John:
Written questions to Terrence Duffy.......................... 175
Written questions to James W. Giddens........................ 178
Chambliss, Hon. Saxby:
Written questions to Hon. Jon S. Corzine..................... 170
Written questions to Terrence Duffy.......................... 172
Written questions to Hon. Jill Sommers....................... 180
Johanns, Hon. Mike:
Written questions to Terrence Duffy.......................... 173
Abelow, Bradley:
Written response to questions from Hon. Pat Roberts.......... 166
Corzine, Hon. Jon S.:
Written response to questions from Hon. Max Baucus........... 170
Written response to questions from Hon. Saxby Chambliss...... 170
Duffy, Terrence:
Written response to questions from Hon. Pat Roberts.......... 172
Written response to questions from Hon. Saxby Chambliss...... 172
Written response to questions from Hon. Mike Johanns......... 173
Written response to questions from Hon. John Boozman......... 175
Giddens, James W.:
Written response to questions from Hon. John Boozman......... 178
Sommers, Hon. Jill:
Written response to questions from Hon. Debbie Stabenow...... 179
Written response to questions from Hon. Pat Roberts.......... 180
Written response to questions from Hon. Saxby Chambliss...... 180
Steenkamp, Henri:
Written response to questions from Hon. Pat Roberts.......... 181
Written response to questions from Hon. Max Baucus........... 181
INVESTIGATIVE HEARING ON
THE MF GLOBAL BANKRUPTCY
----------
Tuesday, December 13, 2011
United States Senate,
Committee on Agriculture, Nutrition and Forestry,
Washington, DC
The Committee met, pursuant to notice, at 10:06 a.m., in
room SH-216, Hart Senate Office Building, Hon. Debbie Stabenow,
Chairwoman of the Committee, presiding.
Present: Senators Stabenow, Harkin, Conrad, Nelson, Brown,
Klobuchar, Bennet, Gillibrand, Roberts, Lugar, Chambliss,
Johanns, Boozman, Grassley, Thune, and Hoeven.
STATEMENT OF HON. DEBBIE STABENOW, U.S. SENATOR FROM THE STATE
OF MICHIGAN, CHAIRWOMAN, COMMITTEE ON AGRICULTURE, NUTRITION
AND FORESTRY
Chairwoman Stabenow. Well, good morning. We welcome all
those and thank all those that will be with us this morning for
a very important hearing. The Senate Agriculture, Nutrition and
Forestry Committee will now come to order.
Before this Committee today are just a few of the former
customers of MF Global, which at the time of its bankruptcy had
38,000 customer accounts.
In the days preceding the collapse, it became apparent that
MF Global would no longer survive as a company.
While companies often make bad decisions and fail, no one
expected the violation of one of the foundational principles of
the futures markets: the protection of customer money. On
Monday, October 31, at 2:30 in the morning, MF Global revealed
that an estimated $900 million in customer money had gone
missing--unaccounted for. MF Global filed for bankruptcy a few
hours later.
Now we are here left with more questions than answers. The
customers are here still waiting to get their money back. And
the executives and the former CEO of MF Global are here to tell
us what they know. And the regulators are here to tell us where
they are in the process of getting that money back and what
they should do in the future to better oversee the financial
management of customer funds.
The Agriculture Committee oversees the futures and swaps
markets in part because those markets are critically important
for the successful functioning of America's agriculture
economy. As I have said many times, nearly 16 million people
have jobs because of agriculture in this country. And in this
difficult economy, agriculture has been one of the few bright
spots. And, frankly, we want to keep it that way.
Situations like what happened at MF Global threaten that
success. Our farmers and ranchers have lost trust in the
system. They believed that there were safeguards in place to
protect their money in exactly situations like this.
A fundamental principle of futures trading is that customer
money must always be kept separate from the firm's money.
It is estimated that as much as $1.2 billion in customer
money is missing. I know that every member of this Committee,
and certainly the customers who are here today, and those
across Michigan and across the country, would like to know what
happened to that money. It has now been a month a half since
the firm collapsed, and customer money is still nowhere to be
found.
This is not the Dark Ages. MF Global did not keep their
books with feather quills and dusty ledgers. The rules about
keeping customer money segregated are pretty straightforward.
That it has been over a month and teams of lawyers and forensic
accountants still cannot figure out what happened raises very
troubling questions.
So I am very eager to hear from the executives, as well as
the trustee, as well as the front-line regulators about what
happened.
This hearing is about three things: getting the customers'
money back, holding anyone engaged in wrongdoing accountable,
and ensuring that proper customer protections are in place so
that something like this does not happen again.
The customers here today, and the thousands of others
across the country whose money is missing, deserve answers. And
I hope we can get some of those answers today.
I would now like to turn to my colleague and friend,
Senator Roberts, for his opening remarks.
STATEMENT OF HON. PAT ROBERTS, U.S. SENATOR FROM THE STATE OF
KANSAS
Senator Roberts. Thank you, Madam Chairwoman, for calling
this hearing on MF Global's bankruptcy and its effect on our
Nation's economy.
As you have said, this Committee has jurisdiction over the
futures markets and its regulator--the Commodities Futures
Trading Commission. The futures markets provide businesses and
investors--whether they are individuals, companies, farmers,
ranchers, cooperatives, or others--the opportunity to manage
risks.
In light of recent events, it is imperative that this
Committee exercise its oversight responsibilities to understand
what happened in the days leading up to MF Global's bankruptcy,
who was involved in any actions that resulted in the company's
downfall, and how to move forward.
First and foremost on my mind is how customer accounts will
be made whole. Reports indicate anywhere between $600 million
and $1.2 billion of customer funds are missing.
The fundamental rule in the futures markets business is to
segregate--to keep apart--customer accounts and company
accounts. Some believe this rule was broken in this case. If
this is the case, that is what we are here to find out.
Among the witnesses today are officials from MF Global who
can help answer the many questions that I and other members of
the Committee have.
According to testimony given in previous hearings before
this Committee and in the House, customer funds were accounted
for on Wednesday October 26 and believed to be accounted for on
Friday, October 28. Yet by Monday October 31, they were gone.
CME's press release of November 2 states, and I quote, ``It
now appears that the firm made subsequent transfers of customer
segregated funds in a manner that may have been designed to
avoid detection insofar as MF Global did not disclose or report
such transfers to the CFTC or CME until early morning on
Monday, October 31, 2011.''
Funds do not simply disappear. Someone took action, whether
legal or illegal, to move that money. And the effect of that
decision is being felt across the countryside.
Now, the buck stops somewhere, and between the three
witnesses from MF Global here today, I hope we can find out
where those hundreds of millions of dollars landed.
Since MF Global's bankruptcy on October 31, we have heard
from many investors, businesses, farmers, ranchers, and their
bankers across the country that are caught up in this event.
Today we will hear firsthand from those hit hardest by MF
Global's collapse. I truly appreciate Mr. C.J. Blew from
Hutchison, Kansas, taking time, his valuable time, appearing
today, as the other witnesses have done, to provide a
description of the impacts on their business interests and
their farming operations.
We will also hear from CFTC Senior Commissioner Jill
Sommers who is leading the investigation and enforcement
actions at the Commission since Chairman Gensler has allegedly
removed himself from these matters. So thank you, Commissioner
Sommers, for appearing here today.
I also thank Mr. Giddens, the bankruptcy trustee in this
matter, for agreeing to be here. Customers have plenty of
questions for you, as I do, about how money can be returned to
those owed. I know you have worked very diligently to return
funds to customers, and I appreciate your efforts.
The Chairman has said it. Producers must have faith in the
safety and stability afforded by the futures market.
The need for faith and confidence in the ability to manage
one's own risk is why we and this Committee will continue to
push to get to the bottom of what happened.
Thank you, Madam Chairwoman. We have several witnesses
today. I look forward to hearing from all of them.
Chairwoman Stabenow. Thank you, Senator Roberts, and thank
you to all of our members that are here today, and we will ask
you to submit opening comments for the record. We do have three
panels with us today, and we want to move directly to our
witnesses. And we thank all of you for being here today, for
coming and joining us. We made a decision to ask you to speak
first because you are the focus of why we are here. You are the
focus of the financial markets and making sure they work well,
and our number one focus is to make sure that you are made
whole and have confidence in the markets moving forward. So we
thank all of you for being here. As you know, we welcome your
written testimony and ask you to keep your oral testimony to 5
minutes today.
Our first panelist is an MF Global customer from Freeland,
Michigan, Roger Hupfer. I welcome you today. Mr. Hupfer is the
president and markets director of Freeland Bean & Grain,
Incorporated. He also sits on the board of directors and
trustees for the Michigan Bean Shippers Association. So we
welcome you.
Next up we have Mr. Jeff Hainline, president of Advanced
Trading, Incorporated, in Bloomington, Illinois. Prior to
joining Advanced Training, Incorporated, in 1982, Mr. Hainline
was a cross-country trade, a barge freight trader, and a
merchandising manager for Behimer and Kissner. He is also a
member of the National Grain and Feed Association's Risk
Management Committee and the CFTC's Subcommittee on
Convergence.
Next I would like to ask Senator Klobuchar to introduce our
next witness from Minnesota.
Senator Klobuchar. Well, thank you very much, Madam Chair.
I am pleased to introduce Mr. Dean Tofteland from Luverne,
Minnesota. Luverne is a town of 2,600 people, and he and his
daughter came all this way because they care very much about
this issue. His family grows corn, soybeans, and raises pigs on
their farm. He currently has over $200,000 in what was supposed
to be a segregated MF Global account which he cannot access and
which he may never fully recover.
He is not a speculator, Madam Chair. He, in fact, invested
to manage risk, locking in prices ahead of the growing season
so he was protected against price fluctuations that could eat
into his profits. If he does not get access to his account
soon, he is not sure what he is going to do for next year's
crop, and he is just one example of hundreds of farmers that we
have in our State right now that want to get their money back
and want to get this resolved.
Thank you very much, Madam Chair.
Chairwoman Stabenow. Thank you.
Finally, along with Senator Roberts, I welcome Mr. C.J.
Blew, who, along with his wife, Becky, operates a diversified
crop and cow-calf operation in south central Kansas. Since
2005, he has served as the director for his local co-op, Mid
Kansas Cooperative Association, located in Moundridge, Kansas.
He currently serves as its chairman.
So, again, we welcome all of you, and I would ask at this
point that you rise so we can administer an oath to you. If you
would stand and raise your right hand. Do you swear that the
testimony you are about to present is the truth, the whole
truth, and nothing but the truth, so help you God?
Mr. Hupfer. I do.
Mr. Hainline. I do.
Mr. Tofteland. I do.
Mr. Blew. I do.
Chairwoman Stabenow. Thank you very much.
Mr. Hupfer, your testimony, please.
STATEMENT OF ROGER HUPFER, PRESIDENT AND MARKETING MANAGER,
FREELAND BEAN & GRAIN, INC., FREELAND, MICHIGAN
Mr. Hupfer. Good morning, Madam Chair, Ranking Member
Roberts, and members of the Committee. My name is Roger Hupfer,
and I am the president and marketing manager of Freeland Bean &
Grain in Freeland, Michigan. I want to thank you for this
opportunity to give you an overview of our company and how the
MF Global bankruptcy has impacted our business.
Our company is a family-owned and -operated full-service
agribusiness. We originated in 1983 and have provided almost 30
years of uninterrupted service to our local community. We
operate two country elevator facilities, which accept corn,
soybeans, and soft white and red wheat, and we also receive,
process, and ship edible beans to various domestic packagers,
canners, as well as interests in Mexico. We also provide feed,
fertilizers, seeds, crop protection products, and custom
application service for our customers. We are members of the
National Grain & Feed Association, the South East Grain & Feed
Association, and the Michigan Agribusiness Association. We are
fortunate to have Jim Byrum representing our agribusiness
interests in Michigan. He has been a great asset to our
industry.
We take great pride in how we operate our business, and we
work very diligently with our customers to help them achieve
their marketing goals. Our customers place great confidence and
trust in us when delivering their commodities to our
facilities, and they expect us to provide and maintain
competitive, perpetual marketing programs to assist them with
their risk management.
It is this very confidence and trust that was shattered by
the MF Global bankruptcy. The industry has always operated
under the assumption that our funds were in a safe and secure
place by being kept in segregated accounts. We were in total
shock when we found out otherwise. Misuse of these funds for
other purposes is not only unethical, but also criminal. Those
responsible for oversight fell far short of fulfilling their
responsibilities in this matter.
Our company has plans to expand and construct a new state-
of-the-art grain receiving and storage facility with
groundbreaking scheduled for 2012. This new facility will help
us meet increased demand and give us the ability to load out
grain unit trains. With this increased demand, how will we be
able to effectively manage the increased volatility and price
risk and place our hedges with confidence if the very integrity
of exchange-based futures trading is in jeopardy? Also, how do
we know if there are other clearing firms that might be in
financial trouble by being involved in bad investments and poor
management?
There are several livestock and dairy producers in Michigan
that have a much greater amount of capital at risk than some of
the commercial grain companies. I can personally give you an
example of a customer of ours who has more capital at risk than
we do. All he was attempting to do was to sell his cash grain
and hedge by buying call options. He is not a speculator; he is
just a prudent operator. If this situation is not resolved, I
feel it will have an impact, a very negative impact, on rural
communities across the country.
When I put together my testimony, I called three other
elevator operators in Michigan and asked for their input. One
of them made this comment. He said, ``It is really sad when my
risk management program needs risk management.''
I can speak for our company and on behalf of the other
agribusiness firms that have been impacted by this disaster
that we expect to be made whole and have all of our funds
returned to us in a timely manner so that the integrity of the
exchange can be restored.
Again, I want to thank you for this opportunity to share my
views with you today. I would be happy to respond to any
questions.
[The prepared statement of Mr. Hupfer can be found on page
137 in the appendix.]
Chairwoman Stabenow. Thank you very much.
Mr. Hainline?
STATEMENT OF JEFF HAINLINE, PRESIDENT, ADVANCED TRADING, INC.,
BLOOMINGTON, ILLINOIS
Mr. Hainline. Thank you, Chairman. My name is Jeff
Hainline, and I am the chairman of Advanced Trading. Advanced
is a non-guaranteed introducing broker that did business with
MF Global. Our customers are farmers, elevators, grain
processors, meat producers, and owned about 3,000 accounts
there. Advanced Trading's customers and its business, with
large sums still unaccounted for, are suffering from confusion
6 weeks after the failure.
I suggest the Committee have most of its focus in this
initial effort on the crucial issue that must be dealt with
immediately. In the grain industry, 100 percent of each year's
supply is produced within a narrow time frame and used
throughout the year. As such, the business is overwhelmingly
dominated, like few others, by inventory management and
financing. Depending on market behavior, borrowings can amount
to many times the net worth of the elevator company, but
lenders make funds available at very competitive rates because
the loan is well secured by verifiable presence of grain in the
elevator and the financial soundness of the futures hedge.
The futures market is the essential central financial
instrument upon which world grain commerce is entirely based,
and any change in the lender's assessment of risk on what can
be an extremely large and rapidly increasing loan balance would
alter their financial relationships with grain businesses in a
dramatic fashion.
Each firm's customer segregated capital is guaranteed by
the capital of the clearing member. Thus far, no statement by
the bankruptcy trustee that I have seen seems cognizant of the
fact that segregated customer funds are guaranteed by the full
capital of the clearing member. It is entirely clear to all
that is a pre-condition of becoming a clearing member of the
Chicago Mercantile Exchange and others. Absent the reality of
that guarantee, the business cannot operate.
Both priority and rapid execution of the priority of
customer segregated funds and bankruptcies of clearing members
must occur instead of years of uncertainty that stretch in
front of us. This principle absolutely must be clear for
futures exchanges. Futures contracts at the Mercantile Exchange
and others are rightly regarded by lenders as financially sound
precisely because and only because each clearing member
guarantees its own capital as a first line to back the customer
segregated funds, and the clearing corporation guarantees the
trades between clearing members. Any ambiguity or hesitation as
to exactly where those necessary guarantees stand will not only
freeze the industry, it will certainly translate into a sizable
multiplier effect in terms of lower prices to farmers and
higher prices to consumers.
It is not overstating the case to project that if the
priority of customer segregated funds in a bankruptcy is not
firmly entrenched, it will need to be in the wake of MF Global
after the effects of not doing so become apparent. This is an
absolute, necessary principle for U.S. agriculture, which is
why this Committee must see that it is upheld.
Many suggest making changes in separation between
segregated funds and proprietary capital, but this could add
complexity and bureaucracy. In the end, even if additional
restrictions on financial instruments or accounting or other
operational measures are proposed, we should remember a few
things: that clearing members also have their capital pledged
to their segregated customer funds against the single greatest
threat they themselves face, which is that their customers
defraud or go bankrupt on them. This has occurred with relative
frequency, and because the capital of the clearing member
itself was acquired to be paid into customer segregated funds,
the other customers were made whole with little delay.
We also know that new financial techniques will arise
hereafter, that accounting rules ambiguities will always foster
different opinions, and that financial executives will always
take innovative steps to maximize returns. So establishing
rules that would have precluded the last problem will not
necessarily preclude the next.
Exchanges have the greatest abiding interest of anyone in
the solvency of the clearing members, the security and good
will of their customers, and the trust of the fiduciaries that
lend large sums to both. While the CFTC and the Committee
should examine what the exchanges do carefully, the exchanges
must propose changes that the CFTC should then consider.
This Committee must use its authority and expertise to
clarify the bankruptcy status of the FCM member's
responsibility to their customer segregated funds, which is the
only way the futures industry at the financial heart of U.S.
agriculture can possibly operate. That is the largest and most
important issue, I feel, with MFG.
In the end, we need to protect our efficient system, to be
vigilant for possible corruption, to send a strong signal of
deterrence. We need restitution of all segregated funds, and we
need a reform of our system to prevent abuse.
I would like to thank the Committee for its consideration
and would welcome any questions.
[The prepared statement of Mr. Hainline can be found on
page 134 in the appendix.]
Chairwoman Stabenow. Thank you very much.
Mr. Tofteland, welcome.
STATEMENT OF DEAN TOFTELAND, FARMER, LUVERNE, MINNESOTA
Mr. Tofteland. Hello. It is an honor to be here today. I
want to thank Madam Chairwoman Stabenow, Ranking Member Senator
Roberts, and other honorable Senators of the Committee. I
especially want to thank my home State Senator Klobuchar for
her support.
My name is Dean Tofteland. I am a farmer from southwest
Minnesota. My wife and I raise corn, soybean, and pigs as well
as four kids 8 to 13 years old. I have been a farmer for about
25 years. Throughout those years, I have used the futures
markets to transfer risk from my farm to the CBOT by selling
futures contracts. These contracts have enabled me and other
farmers to lock in a selling price which could enable a profit
on my production.
Today I want to just briefly describe how this MF Global
bankruptcy has impacted my bottom line as well as how it has
influenced my confidence going forward in these markets.
This past fall, following the harvest, I locked in prices
on the CME for my 2011 production. I did this by entering into
an agreement where I promise to sell a set number of bushels on
the exchange at an agreed-upon price for a future delivery
date. To execute these hedges, I am required to post margin to
an escrow account, in my case which was held at JPMorgan Chase
Bank. These funds were not an investment in MF Global. These
funds were not a loan to MF Global. These funds were simply
collateral required by the exchange as a guarantee for my
promise to deliver the bushels I had priced.
On October 28th I heard news that MF Global may be having
some problems, and I immediately called my broker. She told me
that since my funds were in ``customer segregated accounts,''
they were not a part of MF Global and would not be affected. I
was told that ``no customer has ever lost a penny in segregated
accounts.'' I later read about that statement before--after
that, or I ran across it before. At this time I was not aware
that the company was mailing bad checks to customers.
That following Monday, October 31st, I read that MF Global
had filed Chapter 11 background and later learned that customer
funds were missing. The accounts were immediately frozen, and I
was unable to adjust my short positions. The hedge account at
this time contained $253,000. This account was also counted as
collateral at my bank against my operating loan. It was not
long before I received a call from my banker asking about it.
Later, my positions were transferred to a new broker with
only 15 percent of the required collateral. I was then informed
that I needed to re-margin the hedges within 24 hours, even
though I had more than three times the margin already at the MF
Global account. As a result of this, I was forced to liquidate
my hedges. Since that time, prices have dropped significantly,
resulting in well over an additional $100,000 in losses.
On the morning of November 9th, I sat through a USDA Crop
Production and Supply and Demand Report. This was one of the
biggest crop reports of the year, and being unable to adjust
positions created a great deal of stress. I have not used the
futures market since.
Producers like myself commonly purchase seed and fertilizer
and pay cash rents far before the crops are planted. The use of
these markets is imperative to reduce risk, but we must have
the confidence to do so.
As you know, this impact has been felt far across this
country, and just in my local area, I ran across a feed company
and local producers of livestock that are still looking for
answers and how to get their money back. There are also many
other untold stories.
I hope that in the following panels we can get some of
those answers to fill in the blanks. I look forward to finding
out those answers because the truth of the matter is that
commingling money is stealing money, especially when it
disappears.
I want to again thank each of you for your invitation. I am
encouraged by your hard work, and I believe in the end that we
will get the answers we need, and it will make for a more
efficient and confident marketplace where customer assets are
safe.
Thank you.
[The prepared statement of Mr. Tofteland can be found on
page 159 in the appendix.]
Chairwoman Stabenow. Thank you very much.
Mr. Blew?
STATEMENT OF CLINTON J. (C.J.) BLEW, FARMER/RANCHER, CHAIRMAN
OF THE BOARD, MID KANSAS COOPERATIVE ASSOCIATION, AND DIRECTOR,
BOARD OF CHS, INC., HUTCHISON, KANSAS
Mr. Blew. Good morning, Chairwoman Stabenow, Ranking Member
Roberts, and members of the Committee. As Madam Chairman
indicated, my name is C.J. Blew, and I do operate a farm and
ranch in south central Kansas. And I am chairman of the board
at MKC, Mid Kansas Co-op, in Moundridge, and I currently serve
as its chairman.
MKC is a full-service farm cooperative offering a full line
of supplies and services for both farm and urban customers in
11 counties throughout central Kansas. Our current membership
is more than 4,800 members. MKC's grain division is operated by
Team Marketing Alliance, or TMA, a LLC wholly owned by four
central Kansas cooperatives operating 48 country elevators that
total 38 million bushels of elevator space.
I also serve on the board of directors of CHS Inc., the
Nation's leading cooperative. CHS is an energy, grains, and
foods company owned by approximately 55,000 individual farmers
and ranchers and about 1,000 local cooperatives.
Thank you for the opportunity today to provide not only my
personal perspective, but also the perspective of MKC on the MF
Global bankruptcy and the effect it has had on agribusiness and
production agriculture.
I consider myself fortunate because, unlike other fellow
farmers and ranchers, I do not personally have assets tied up
in the MF Global bankruptcy. However, I am impacted as an
individual farmer because I rely upon my local cooperative to
manage my risk by forward pricing my grain.
This bankruptcy has sent a shockwave throughout the
industry. We have long believed that risk to segregated
customer funds held by members of the clearinghouse was non-
existent. We now realize that was not true. The attorney for
the trustee in the bankruptcy case, just last week during the
House Ag Committee Hearing on MF Global, also confirmed this in
his reference that 100 percent of these funds need to be
returned as promptly as permitted by governing regulations.
Immediately following MF Global's bankruptcy filing, MKC
and its respective grain marketing arm, Team Marketing
Alliance, struggled with lack of access to futures positions
and had no access to the funds in our accounts. Additionally,
our accounts were transferred to a new futures commission
merchant, and we have spent countless hours trying to
understand how and why various adjustments to account balances
took place.
My cooperative continues to deal with the aftermath of this
situation. At the time of the MF Global bankruptcy filing, my
co-op had a significant amount of assets in segregated accounts
tied up with MF Global. While we now have access to positions
in our hedge accounts, only 36 percent of the initial margin
funds needed for the transferred positions have been
transferred to the new accounts. We applaud the SIPA trustee's
proposal for an additional distribution of funds and property
that would bring the value of our distributions to about two-
thirds of the original account values.
However, for MKC, there is still a significant amount, or
about 64 percent, of the margin funds and excess cash not yet
received. This needs to be priority number one for the trustee
and bankruptcy court. Segregated funds should not be part of
the bankruptcy.
I am here today to ask the Committee, regulators,
exchanges, and trustee to make the return of customer funds and
property a top priority. Customer funds were to be segregated
and not used for other purposes. The confidence in the system
has been compromised, and it is imperative that we restore the
integrity of the system.
The ability for thousands of businesses like MKC and CHS to
hedge risk on an exchange offers producers a wide range of cash
forward contracts that help optimize farm income. MKC's
business model has been one that helps producers manage their
risks. This includes grain marketing. Hedging and forward
contracting is an integral part of that.
A key to providing any type of hedging and forward
contracting is the ability to finance it. We are fortunate to
have a strong relationship with our lender. Although we have
that strong relationship, the MF Global bankruptcy has impacted
our ability to borrow funds. It has impacted our borrowing base
since the missing funds cannot be used as collateral.
Looking ahead, it will be very important to re-establish
confidence in the futures markets and the safety of segregated
customer funds and property. As part of the process, we must
ensure the sanctity of customer segregated funds. This should
include the treatment of missing funds in the bankruptcy, and
those funds should have exclusive rights above the bankruptcy.
This process must be a priority and expedited to make all
segregated account holders whole.
In conclusion, I would ask that this situation be resolved
as quickly as possible and that MKC's assets and those of other
segregated account holders affected by MF Global's bankruptcy
be returned immediately. I would also ask that you ensure this
situation never happens again.
Thank you again for the opportunity to share my views
today. This concludes my prepared remarks, and I would be happy
to respond to any questions.
[The prepared statement of Mr. Blew can be found on page 99
in the appendix.]
Chairwoman Stabenow. Thank you very much, and I appreciate,
again, all of you being here. We are deeply concerned about the
situation you find yourselves in, and through no fault of your
own.
Let me first start by asking each of you, if you were in
our shoes and could say anything to the executives of MF Global
or the regulators or the trustee, what would you want to say to
them? Mr. Hupfer?
Mr. Hupfer. Well, I think like the other comments that were
made by the other panelists, I think the money needs to be
returned in a fashion--I mean, segregated accounts need to be
held above the bankruptcy, in my opinion. I think there needs
to be a full investigation, and we need to have some safeguards
in place where this cannot happen again.
Production agriculture cannot operate and function without
the use of exchange-based futures and being able to transfer
risk and lock in pricing. That is integral. It is just
impossible for the industry to operate without that ability.
So I think this is crucial. This affects not just
commercial grain companies, but I think it affects farmers,
dairymen. There are a lot of people that are greatly affected
by this.
Chairwoman Stabenow. Thank you.
Mr. Hainline, what would you want to ask of those we are
going to hear from yet today?
Mr. Hainline. Well, obviously my point was having the
segregate funds a priority, but the thing that I wonder is, in
light of all the financial problems that we have had over the
last several years, how were these speculative investments
allowed to be part of segregated funds?
Chairwoman Stabenow. Thank you.
Mr. Tofteland?
Mr. Tofteland. I guess the real question is: What happened
to the money? This money was real money in real banks. It was
not under somebody's mattress. And now it is missing. And when
you have a--I know in your personal bank account, the bank
knows if you are overdrawn one penny. The bank knows if you are
1 day late with your payment. The bank knows where the money is
at. Somebody at the company knows where the money is at. We
have to ask--if there is a debit, there has got to be a credit.
Where is the credit?
And, secondly, since there were bad checks mail, there has
already been crimes committed. And if the rules are broken in
the case of segregated money, the segregated funds were
commingled, that is also a crime. So I guess if there were
crimes committed and the money is missing, we have got to find
the money and then deal with the consequences of that.
Chairwoman Stabenow. Thank you.
Mr. Blew, what would you want to ask?
Mr. Blew. I would agree with Mr. Tofteland. Where is the
money? You know, this has a rippling effect, I think,
throughout the industry. Not only does it--you have got farmers
double-margining. You have got people that have stress on their
lending situations already. So it is imperative we get to the
bottom of it.
Chairwoman Stabenow. Thank you.
Secondly, for any of you that would want to answer this, do
you think commodities firms like MF Global should be allowed to
invest customers segregated money and profit from the
investments? Mr. Hupfer?
Mr. Hupfer. I think segregated funds should be segregated
funds and need to be treated that way. I guess that is how I
feel about it. It is our money.
Chairwoman Stabenow. Mr. Hainline?
Mr. Hainline. I think that controls are an imperative if
that investment is allowed. I am not sure that our current
regimen has enough oversight to know where those monies are,
and as I said previously, I think the classes of those
investments have been way too far afield for protection of the
customers.
Chairwoman Stabenow. Yes, Mr. Tofteland?
Mr. Tofteland. The issue with--I guess I have no comment
about that. What was the question exactly?
Chairwoman Stabenow. Well, do you think that companies, I
guess, commodities firms, should be able to invest customer
segregated dollars under any circumstances?
Mr. Tofteland. No, I do not believe--I understand that
there are some stress on the profits. Interest rates are low.
It is hard for these companies to make money on their idle
cash. But in this case, there were rules that were pushed.
There was influence, I think, undue influence put on the CFTC
and the SEC, and maybe some conflicts of interest that
transpired, and the rules should not be pushed like that. So,
no, there should not be any investment of these funds.
Chairwoman Stabenow. Mr. Blew?
Mr. Blew. Segregated funds are segregated funds for a
reason. We must ensure the sanctity of segregated funds.
Chairwoman Stabenow. Thank you.
Mr. Tofteland, you testified that you have not used futures
markets since MF Global's bankruptcy. Could you talk a little
bit more about how that affects your business not having the
confidence to use that market?
Mr. Tofteland. Well, first of all, we are still out of a
lot of capital, so to be involved here, you have to have
collateral for the exchange. Unfortunately, I was forced to
liquidate my hedges, and, you know, we have been unable to
hedge since that time, and I am going ahead and looking at my
input expenses for next year, and it is hard to--when you do
your break-even analysis, you need to look at the prices
offered for next year, and I just do not have the confidence
right now until we get 100 percent of our cash back to have 100
percent confidence until that point.
Chairwoman Stabenow. On that point, if any of you would
like to answer, my last question is: Given the bankruptcy, I
assume this has caused you to take a closer look at any new
futures commission merchant and its financial position. I
wonder if anyone might just speak to that, going forward what
this has meant to you as you are attempting to do business,
assuming that you are. Mr. Hupfer?
Mr. Hupfer. Well, we work with Mr. Hainline's firm,
Advanced Trading, and they got all our positions transferred in
a really good fashion, very orderly. So we are in the process
of--we are with a new clearing firm, and we are going to open
an account through them with another clearing firm in the near
future to spread our risk.
Chairwoman Stabenow. Mr. Hainline, from your perspective,
how are you evaluating things differently? Or are you?
Mr. Hainline. It is very unfortunate, but I think you have
to. Numerous clients are asking about having more than one FCM
so that at a moment's notice we can transfer accounts if
somebody throws up a red flag. The inefficiencies of that kind
of activity that it needs to be required is rather significant,
but, again, for people to protect their risks, those are some
of the conversations that are, unfortunately, going on because
of the system.
Chairwoman Stabenow. Thank you. I am going to stop at this
point. I have run over my time. As I am sure my colleagues have
noticed, we are doing 7 minutes of questions given the topic
this morning. We will ask colleagues to watch closely for the 7
minutes.
I will turn now to Senator Roberts.
Senator Roberts. Well, thank you, Madam Chairman.
Gentlemen, thank you for coming. You have certainly put a
personal face on this travesty. You have accurately described
the breach of trust for yourselves personally and for everybody
else involved. Really, this is a violation of the most sacred
rule of the futures industry, you do not break the glass in
regards to segregated funds. It has not happened before until
this incident. Thank you for your personal testimony. That took
some guts.
I want to certainly thank you for clarifying for everybody
present the severity of this issue and the personal experience
that you have gone through, which I think is very helpful. We
obviously need answers, and we are dedicated to that.
Mr. Blew, it sounds like--well, welcome to Washington, I am
sorry under the circumstances, but at any rate, it sounds like
Mid Kansas Co-op is well on its way to getting up to 72 percent
of its money back, according to the trustee. You and I have
visited about that. Have you received any official indication
from the trustee on this? You indicated that you are at 36
percent. We need to get you up to that 72 percent.
Mr. Blew. We have not received anything officially to get
us to the 72 percent. We know we are at the 36 percent, but
have not received anything officially on the 72 percent, no.
Senator Roberts. I hope we can get that taken care of.
Seventy-two percent is better than where you stood a week ago,
but you are not made whole. Walk me through the conversation
that Mid Kansas Co-op is having--that is 5,000 farmers. That is
my count. You said 4,800. But walk me through the conversations
that you have been having with your bankers in the aftermath of
the MF Global bankruptcy. Are your bankers requiring you to
come up with more collateral against your margin account?
Mr. Blew. Well, it is pretty simple, really. We have
working capital requirements that are 7 times our borrowing
base, and so you take the number times 7, and that is the
number that we cannot borrow.
Senator Roberts. For the entire panel, in your testimony
this morning all of you have referenced a loss of confidence in
the futures market in the aftermath of the MF Global
bankruptcy. That in and of itself is of tremendous importance.
What changes are you going to make or recommend to how you
or how your companies manage risk as a result of this
bankruptcy? We will start with Mr. Hupfer and just go right
down the line.
Mr. Hupfer. Well, first and foremost, getting our accounts
transferred----
Senator Roberts. I cannot hear you.
Mr. Hupfer. I am sorry. I said first of all, having our
positions transferred and opening another account with
another----
Senator Roberts. Can you turn the microphone on? I am
sorry. Maybe it is me. It turns red.
Mr. Hupfer. Sorry about that. Is that better?
Senator Roberts. Speak right into the microphone. Yes,
thank you.
Mr. Hupfer. Okay. Having our accounts transferred to
another clearing firm and opening a secondary account I think
goes a long way toward spreading our risk. I think everybody--
talking with the other commercial operators that I visited
with, they are all more--I do not want to say cognizant of what
they are doing with their excess funds. You know, they are
withdrawing. You know, they are drawing--if they have margin
excess, they are bringing it back to their checking accounts.
They are not leaving it there. I think people are doing things
a little bit differently as more of a precautionary measure.
Senator Roberts. I appreciate that.
Mr. Hainline?
Mr. Hainline. Well, unfortunately, the biggest problem is
that because of this uncertainty, many are choosing not to
utilize the futures market at this point, and so that means
your alternative is to sell it to--if you are a producer, to
sell it to a grain company and have no further flexibility in
managing your risk. And then that also introduces you to a
different counterparty risk.
So these are very dire circumstances, as Mr. Tofteland
said, from November--or from October 28th, the last day he
could have placed a trade with MF Global, until Wednesday of
this last week--I am not sure the size of his farm, but if he
had 2,000 acres of corn with an average yield of 170 bushels an
acre, he had the price go down a quarter of a million dollars
on his farm. And that is just catastrophic in the results of
his risk management for his operation.
Senator Roberts. Mr. Hupfer, I apologize to you. Something
is wrong with our sound system, but I think it has been fixed,
and you came through loud and clear, Mr. Hainline.
Mr. Tofteland, thank you for personal statement. I know
this has been pretty rough on you. Would you like to respond?
Mr. Tofteland. Well, I just wanted to say that this is not
about myself. There are thousands and thousands of other
farmers and end users and individuals, traders, people I know,
somebody out there with their live savings that was taken
there. And they are probably looking at their next meal and how
they are going to make their payments next week.
I think the bigger issue is not just confidence in this
market. This market is the basic market of--it goes back over a
hundred years. The basic trading began with the cash trading on
the Board of Treasury and the Minneapolis Grain Exchange, where
they used to trade cash at the exchanges or trade rail cars,
and then it moved to the futures. The historical basis of this
is the foundation of all of our exchanges going--all of our
transactions. So the confidence here really relates to the
confidence in a lot of other markets, and that is why it is so
important to get it right here.
Senator Roberts. Mr. Blew.
Mr. Blew. I really do not have anything further. I think
the panel has covered it well.
Senator Roberts. Okay. For the entire panel, have any of
you had any conversations with your bankers about changing the
operation of your risk management accounts as a result of this
bankruptcy? You have told the Committee what you plan to do.
Any whispering in your ear by your banker?
Mr. Hupfer. I can respond. Now it is working. Our banker
called us right after the bankruptcy became public, and he
wanted to know what the situation was, and we explained to him
what was happening, what was going on, that we were
transferring--getting our trades transferred. And since then he
said just keep him abreast of what is happening, and they have
confidence in us that we know what we are doing and that we can
make good decisions.
Senator Roberts. Mr. Hainline.
Mr. Hainline. I have not heard specifically, but if I put
my banker's hat and I was loaning money to Roberts Elevator, I
do not think I would loan him as much money as I did before
because I do not know your money is safe there.
Chairwoman Stabenow. And I would ask the other two folks to
answer quickly, please.
Mr. Tofteland. Okay. Just briefly, I know with my bank--and
he has talked to me about it. For every dollar that we have, we
can borrow about 40 cents. If my bank was borrowing me 30 times
over, I suppose he would be a little more concerned. At this
time he has got confidence that we will get things figured out.
Mr. Blew. Well, obviously the confidence in the system has
been compromised, and so they are going to be unwilling to loan
as much as they would have. I think the challenge in the future
for me, especially for my cooperative to be able to finance my
grain when I want to forward price it, is going to be
imperative, and I know that has been put at risk.
Senator Roberts. Well, I would just say who at the end of
the day ends up footing the bill for these additional costs,
and I think we all know that. Thank you, Madam Chairman.
Chairwoman Stabenow. Thank you.
Senator Klobuchar?
Senator Klobuchar. Thank you very much, Madam Chair. Thank
you to all of the witnesses. I thought your testimony was
really helpful in making people understand what this really
meant to the individual farmer or elevator owner, and I
especially wanted to thank you, Mr. Tofteland, for your direct
testimony and honesty, so thank you for that.
I think a lot of people have a hard time understanding how
all of this works. It gets so complicated. But I think from
your perspective, one of the things that you focused on was
that for you this was not just an investment where you were
trying to make a profit. You were actually not speculating. You
wanted to be able to secure yourself against risk. Could you
just talk a little bit about some of the risks you faced with
the cost of feed, weather, prices, and why you would get
involved in doing this to begin with?
Mr. Tofteland. Thank you. A lot of farmers, what we will is
we will lock in--like any of us, you lock in your cost of seed
and chemical fertilizer many months ahead. So when you do that,
you have price risk. But then during the grain season you also
have production risk. So it is not unlike an end user that
purchases flour. They need to buy wheat, and to lock in the
prices, they will go to the exchange and lock in prices and
pass the locked-in production on to their customers.
So basically we are not unlike an end user in that fashion
where we just lock in the prices and use it for reducing the
risk.
Senator Klobuchar. You also mentioned that you were forced
to liquidate your open positions after they were transferred,
and I think it is important to note that even if 100 percent of
the customer funds are found and returned, you will still take
a loss. Can you explain how that works for people who are not
familiar with your situation?
Mr. Tofteland. In the case that we would take a loss?
Senator Klobuchar. Yes. I think the issue is that even if
it is returned, you still will have a loss because of what you
explained earlier.
Mr. Tofteland. I see. Absolutely. When you are not able to
lock in your price risk, you have risk to the market. Markets
move and in my cases and in many farmers' cases, if they have
locked in their seed and chemical fertilizer and their inputs,
if they cannot hedge that or sell to lock in that profit, they
are at risk for the market going down. In my case, the market
worked adversely against us.
Senator Klobuchar. You know, you talked about how other
people have been affected by this, and I know you are from
Luverne. Not everyone in this room is probably familiar with
Luverne. It was actually one of the four towns featured in the
Ken Burns movie about World War II because so many people were
lost from this small town of 4,000 people. Could you talk about
other people that may have been affected by this that you know
in this small town and the surrounding areas?
Mr. Tofteland. I do know, I just ran across Mike and Brad
Mouw, a three-generation feed and grain operation that I used
to buy my feed for my pigs from, and they are affected by this.
There is also a former banker that I used to work with that
finances and works with hog producers. I know a lot of
livestock producers personally that have been affected. They
are hooked both ways because they hedge their hogs and also
they hedge their feed. So there is kind of a double-barrel
effect there.
Senator Klobuchar. For 25 years you have been farming, Mr.
Tofteland, and you said that now you cannot use the futures
market right now, you have not been able to use it since your
accounts have been frozen. But, personally, what will it take
to restore your confidence in the market and the safety of
segregated customs funds so that you would use this market
again.
Mr. Tofteland. I believe we are going to need 100 percent
confidence that these funds are safe, and going forward, I
think we are going to have to see some--we are going to have to
see some results on--if there was some wrongdoing, we have to
see that we--I will put it a simple way. If the cows are out,
instead of building a bigger fence, we have got to make sure
the fence holes are fixed and that the--you know, maybe we have
got to put a little charge in the fence so next time the cow
sticks its head through the fence, he will remember the shock
and will not do it again.
Senator Klobuchar. I will not go there with the electric
fence and the commodities market, but what you are saying is
that you think we have to have some rules fixed so this does
not happen, as well as getting your money back. Is that right?
Mr. Tofteland. That is right.
Senator Klobuchar. Mr. Blew, Minnesota has more farm co-ops
than any State in the country, and Senator Thune and I co-chair
the Congressional Farmer Cooperative Caucus, and I know from
farmers all the time the central role that co-ops play in
managing risk, and I would really ask you the same question
that I asked of Mr. Tofteland. What do you think is necessary
to restore confidence in this market?
Mr. Blew. Well, I just think that we need to ensure the
rules that are in place are enforced. We have got rules there.
Let us just make sure that we enforce them.
Senator Klobuchar. Okay. Very good. Does anyone want to add
anything to that from the panel?
[No response.]
Senator Klobuchar. All right. Very good. Thank you very
much, Madam Chair.
Chairwoman Stabenow. Thank you very much.
Senator Lugar?
Senator Lugar. Well, thank you very much, Madam Chairman. I
would like to ask you, Mr. Tofteland, you mentioned that there
has to be 100 percent confidence that your funds are safe, and
I am just curious as to how in this business we are talking
about today or in any business you can have 100 percent
confidence that your funds will be safe. Specifically, if you
have to rely upon some other firm, why would you or those you
are associated with have come together with MF Global?
Mr. Tofteland. I think what you are relating to is, you
know, MF Global, did I have any idea that this was going to
occur or anything, you mean? The 100 percent confidence relates
to--I mean, when we came to MF Global, we actually were
transferred there from a different firm. I think a couple
different firms had--a lot of companies change and they
purchase each other, and we came in a transaction from, I
think, ING before. But I think the bottom line is what you are
saying is a lot of companies will fail, and it happens all the
time on Main Street. The difference is in this case there was
customer money that was affected and that was taken. So it is
really about the money. It is not about--a lot of bankruptcies
happen, but the way this bankruptcy has been going forward, it
does not make sense because customer money should be the first
disbursed, and then we would not have this issue with customers
being affected.
Senator Lugar. Yes, well, I would agree with that, and I
think everyone here does. But the fact is that in business of
any sort there are risks taken when you are transferring some
responsibility for a service, in this case the futures market,
to somebody. Perhaps you may feel this is too complex to
understand who you are dealing with and who they may be dealing
with, but then the panel would come back to us and say, but, by
golly, there has got to be 100 percent certainty. And I do not
think there is such a thing in this world.
What I am curious about is, is anybody on the panel aware
that you were dealing with MF Global at all and have any idea
about the nature of that firm and the sort of operations that
they were involved in?
Mr. Hupfer. No. I do not think we had any idea at all that
they were of the scope--that they were involved in some of the
investments, some of the things that they were doing. We just
cleared our trades through there, working with Mr. Hainline's
firm, and we had no clue as to any of that.
Senator Lugar. Mr. Hainline, since Mr. Hupfer had some
confidence in your firm and, therefore, you may have more of a
front line with this situation, why were you dealing with MF
Global?
Mr. Hainline. We trusted the system, Senator. The Board of
Trade goes to lengths to explain how nobody has ever lost money
in this situation. You know, it is their standard line that
they give, and it is a line you could have been proud of up
until the last 6 weeks.
Your point about 100 percent is right on. There is nothing
that is 100 percent. So how can you have confidence in our
system? If we knew that the lenders that finance FCMs got no
dollar one until segregated funds were all covered, then you
could be confident that the lenders, if they were doing their
due diligence, would, in effect, be looking out for the
segregated funds. I think that is really the key issue that I
would like to leave you with. If we had the lenders in between
the segregated funds and the customers, I think we could have
much more confidence that you have got due diligence that a
farmer, a local cooperative cannot perform. The lenders have
covenants they can put on the FCMs that borrow money from them,
and that could help lead to a lot more confidence. Maybe not
100 percent, but a lot more than what we have today, and maybe
more than we can get from regulators.
Senator Lugar. Well, these covenants that you would place
on the FCMs, as you say, does not, once again, offer 100
percent confidence. But the thing that disturbs me is I had
conversations in New York a week ago Monday with investment
bankers in various ways. I was surprised but pleased in a sense
that they had been conducting what they called ``war games,''
and essentially this was with regard to the European markets
and the financial problems there. What would happen if various
systems failed in Europe or the whole system failed or the euro
failed or what have you? What are the implications back and
forth with regard to their institutions?
Well, obviously, they are very severe. This is the world in
which we are living. And you would have no way to know that in
this case FC Global was engaging in buying bonds in some
European country that is not turning out very well, or maybe
you would have. I do not know how close the ties are here. But
I would just say at this particular time, whether it is in the
future market for agriculture or for anything, this is a very
precarious period.
So I think, you know, we are all of a mind to want to know
how the CFTC or the U.S. Government in any way can provide
greater security for farmers and ranchers and so forth. But one
of the purposes of this panel this morning, I would think, is
these are folks like yourselves engaged right on the front
lines who have some idea of what is going on in the rest of the
world, although you may not want to know that much about it.
And in this particular case, the ramifications have come home.
Thank you, Madam Chair.
Chairwoman Stabenow. Thank you very much.
Senator Bennet. Thank you, Madam Chair, and I would like to
thank you and the Ranking Member for holding this hearing.
Mr. Hainline, in your testimony you said that--to
paraphrase what you said, you said if we cannot have confidence
in the futures market, it is going to mean lower prices for
farmers and higher prices for consumers. I wonder, since most
Americans do not know how the futures market works, if you
could describe for the Committee in the simplest terms possible
how it works and why the result that you describe is the
outcome of a lack of confidence in the futures market.
Mr. Hainline. I think I will go back to Mr. Tofteland's
example. He buys his seed and fertilizer many months ahead of
when he is going to harvest his grain. He probably should have
been buying it already for the crop he is going to harvest in
October of 2012. He then has risk of falling prices because he
has locked in his input. If he does not use the futures market
or an options on a futures market, he either stays long his
price risk or he sells it to a third party--a local grain
company, an international grain company--and at that point he
has now entered a counterparty risk with whoever that entity
is, and he also has no further upside potential if markets
would rally. And if his crop is hurt because of weather,
adverse weather, how does he protect himself if he has made a
forward cash sale? He cannot.
And so he becomes much less efficient in his ability to
adjust his operation to the changing nature in our global
environment. Mother Nature just does not give him a phone call
and say when it is going to be good or bad. He has to make
these plans far in advance. So as he is unable to be flexible
in that, that loss of flexibility means less revenue to him as
a farmer.
On the other hand, whoever is selling his product to the
flour mill or the ethanol plant or the export company or the
chicken feeder, whoever is selling that is uncertain when they
are going to buy it from Mr. Tofteland, because he cannot make
a decision either. And so all of us that buy food or gasoline
are going to have a larger price to pay because of the
uncertainty on when he can sell his product.
So it makes us inefficient. The seller has no idea what his
real price can be because he cannot manage his risk, and the
buyer has the same on the opposite side. So it totally breaks
down what is the most efficient part, I believe, what really
makes agriculture such a wonderful system in the United States.
It just goes to the heart of what those efficiencies are.
Senator Bennet. And just to be clear for everybody who is
watching, this market is not a recent creation, this futures
market. This has been part of American agriculture from the
beginning.
Mr. Hainline. Yes. You know, what is it? Since the Civil
War we have traded futures contracts in Chicago, and it is a
system that has evolved, and it is just miraculous now. We do
not flash fingers as much as we did before. It is electronic
trading. That brings it a lot closer to our farmers. Again,
another efficiency that I think has been good for most people.
But you have got to have trust, and this whole situation has
shot that.
Senator Bennet. Well, that brings me to my second question,
and I would be happy to have the rest of the panel answer this
as well. You have described well the economics of this for our
farmers, the consequence of it, but it also has a profound
psychological effect. And I wonder if the panelists would mind
talking a little it about what the scale of this has meant to
all of you, to your communities. How large an impact has this
been on your work?
Mr. Hupfer. Well, personally in our situation, we do not
have a tremendous amount of capital at risk, but it has just
shaken the confidence for commercial grain firms in the system.
The system has worked for a long time. It has been very
efficient.
I think, you know, trust goes a long way. Without the
ability to lock in prices, I think--how do we go out and, like
Mr. Tofteland was mentioning, lock in his inputs? How do we
offer him a price for 2012 and beyond where he can deliver--he
can lock in a price and deliver his grain at a future time. As
we buy grain in the commercial companies, commercial sectors,
we cannot find a cash buyer immediately. We have to hedge. We
have to pool our inventories. It is very efficient in how the
system works.
So I guess locally, talking to some of the other firms, it
has just really shaken the confidence, and everybody is just
kind of wondering what is going to come out of this.
Senator Bennet. Mr. Blew, do you have a view?
Mr. Blew. Yes, my comment was just going to be that farming
is a risky business today, and it is a margin business. We have
to be able to manage it, and we have to have the confidence in
the system that we have the capability to manage it.
Senator Bennet. Mr. Tofteland, if you have got anything
else. You have been the star witness.
Mr. Tofteland. Just real briefly, because I think a lot of
this is transparent back on the farm. What happens, it has just
been assumed you can transfer your risk or you could call your
elevator and make a verbal sale to the elevator, and the
elevator will turn around and hedge their position immediately,
and then later they will follow up with the paperwork. But they
will actually make a verbal committed sale by picking your
phone up and saying, yes, I will sell 10,000 bushels of corn,
and he writes it down and makes a transaction based on our
word. It is just a handshake agreement until you follow it up
with paperwork.
We have been sitting back, and I think we take it for
granted because there is the SEC and the FTIC and FERA and even
the CME is all involved in regulating the industry and watching
all this for us. That is what we have these people for. They
are experts in what they do. And I think we need to learn to--
well, we need to fix what is going on here, but going forward,
we do have a lot of people that are in the ball field working
on this. So that will be a part of the confidence to get those
structures right.
Senator Bennet. Well, Madam Chair, in my State and many
States, the farm country is actually leading this recovery as
commodity prices have come back, and this could not, I think,
have happened at a worse time, and at least for my part, I
cannot imagine anything that would help restore that confidence
than getting the money back to the people that wonder where it
went. So thank you for holding this hearing.
Chairwoman Stabenow. Thank you very much. I could not agree
more.
Senator Grassley?
Senator Grassley. Madam Chairman, I am going to pass up
asking questions of this panel because I want to get to the
other panel, but I would say that the same concerns that have
been expressed by all the other people, hearing their problems
in their respective States, is also true of Iowa as well. So I
thank our panel for coming here and giving testimony for
farmers and their protectors throughout the country.
Thank you.
Chairwoman Stabenow. Thank you very much.
Senator Thune?
Senator Thune. Thank you, Madam Chairwoman and Senator
Roberts, for holding this hearing. As Mr. Blew has said,
farming is a risky business, and hedging is designed to help
farmers and producers manage that risk. I cannot help but think
in light of these recent developments surrounding MF Global
that all of us have been made aware that a very critical and
important tool used by production agriculture, and that is,
futures markets and hedging, is not as safe as we once thought.
I have, I guess, three specific questions that I hope get
answered here, probably perhaps better answered by the folks
from MF Global, the regulators, or the exchange. But, one, how
was MF Global able to continue its risky operations to the
point that it had no alternative but to declare bankruptcy?
Secondly, how could the MF Global bankruptcy result in the loss
of hundreds of millions of dollars in segregated accounts
without any corrective action being taken prior to this
happening? And then, finally, how can we be assured that this
is not going to happen again?
And, Madam Chairwoman, I would suggest that I believe we
have got two very distinct responsibilities. One is to make
sure that we make every conceivable effort that those who have
lost money due to the failure of MF Global are made whole; and,
secondly, that we do everything within our jurisdictional power
to ensure that futures markets are safe for those who use them.
And so I look forward to the testimony that we are going to
receive later as well as I appreciate very much what we have
heard from our panelists already this morning.
But I do want to come back to some of the ways in which
production agriculture uses the markets, and I want to ask the
producers out there, Mr. Tofteland and Mr. Blew, about when did
you start using futures contracts to hedge your crops?
Mr. Tofteland. I remember back in college I would come
home, and I had a course at the university about hedging, and
this was back in 1998, during the drought, and I asked my dad
about a call option to reduce the risk of the crops he had
already forward contracted and, you know, with the dry weather
and not getting the crop, and literally from back in those
days, came back from school and started applying the principles
of hedging from very early in my career.
Senator Thune. Mr. Blew?
Mr. Blew. Well, as I have stated, I did not personally use
the futures markets, but I do indirectly through my
cooperative. They help me manage my risk very well by helping
me to lock in the margin. They are doing the input side, and
they are also doing the grain side. But they have to be able to
lay that risk off, and so I know that indirectly I am affected
because they have to have that ability to do that.
Senator Thune. And how would you say that hedging has
affected your profitability?
Mr. Blew. Well, if they do not have the confidence in the
system to be able to offer me the service that they have by
locking in that margin, then if I am unable to lock in that
margin, I am at risk for a potential loss because I cannot lock
in my profitability.
Senator Thune. Let me ask you both this question: What will
have the most impact on your profitability in the future--the
passage of the next farm bill or the continued safe use of
futures contracts?
Mr. Blew. I can answer that one pretty quick. The continued
safe use of futures contracts.
Senator Thune. Do you share that view, Mr. Tofteland?
Mr. Tofteland. Yes, I do share that view. I think a risk
management package in both cases would be effective.
Senator Thune. Let me ask you something about how this
problem is impacting just kind of land prices and rents across
agriculture. Do you believe that this is a problem that has
been widespread enough now in your areas that cash rent land
prices are going to be affected in 2013 and future years?
Mr. Tofteland. I believe when you look forward, with the
futures market we are able to pick a window, look through a
window to see what the futures prices are a year or 2 years
out. And so with a lot of cases, a couple years ago, you could
not even market your crop through a local elevator more than
maybe 3 months out because of the uncertainty in the markets
and the potential risk and exposure. It is very possible that
could potentially affect rents and land if you are not able to
look through that window and see what the future is offering.
Senator Thune. And that is the question. If this collapse
results in a diminished use of futures to help hedge inputs and
commodities in the future, does that impact cash rents? Mr.
Blew, do you care to comment on that?
Mr. Blew. That would be speculation on my part. I certainly
can make the argument that it would have an effect at some
point, yes.
Senator Thune. I guess this is more of coming back to the
impacts on your operation in the future, and some of you have
talked about the importance, as you go in dealing with your
lenders, too. What needs to be done, in your view, moving
forward--and this question has been asked, I guess, in some
different forms throughout the course of the day--so that you
will have full faith in the morning that when you wake up, your
account is not going to be frozen and money missing from that
account? What would make you feel more comfortable and more
confident in dealing with your banker with regard to what has
happened and what needs to be done as we move forward.
Mr. Tofteland. As we move forward--I guess I am not sure.
Senator Thune. You need a safe system.
Mr. Tofteland. Yes, a safe system, basically. That is
correct, and confidence.
Senator Thune. Clearly what has happened here has
demonstrated that whatever--there are things that clearly can
fall through the cracks. I guess we have learned that lesson.
Anything, Mr. Blew, you can add to that?
Mr. Blew. Well, with all due respect to members of the
Committee and everybody in Washington, that is what we are here
to figure out.
Senator Thune. Okay. We appreciate your testimony and your
willingness to share your personal examples of how this impacts
you. It certainly has, I think, shined a spotlight on the
importance of us getting this right so that something like this
does not happen in the future.
I think the story here, Madam Chairwoman, is to figure out
what went wrong and to figure out how we fix it so it does not
happen again. You have been very helpful in that regard. Thank
you.
Chairwoman Stabenow. Thank you very much.
Senator Harkin?
Senator Harkin. Thank you, Madam Chair. Nobody, I believe,
is saying that MF Global or any other futures firm owes
customers a guarantee against all losses. I have heard that.
But I want to get a sense of whether customers who are trading
futures realize that under the rules in place when this
happened, a futures commission merchant could invest segregated
customer funds not only in treasury securities and cash but in
municipal bonds, securities of Government-sponsored
enterprises, commercial paper, corporate notes, sovereign debt,
money market funds, and even further, could use customer funds
to trade in-house using what are called repurchase and reverse
repurchase agreements. Moreover, any profits on these
investments of customer funds accrue to the firm and not to the
customer.
Now, I was looking here at a timeline chart. Pre-2000, a
futures commodity merchant could invest your customer's funds
in treasuries, municipals, or obligations fully guaranteed by
the U.S. Government. That is it.
Now, look at the timeline from then to now. Now we got into
corporate notes and sovereign debt and money market mutual
funds. And then we got into in-house transactions and on and on
and on.
Welcome to the world of deregulation, folks. That is what
you get. That is deregulation. And now we hear people say we
have got to have even more deregulation. I wonder. My question
to all of you is: Would a farmer, an elevator manager, or any
other typical customer of futures commission merchant, such as
MF Global, ordinarily know that customer funds were commonly
invested in such a variety of instruments and securities,
profits of which do not accrue to the customer but only to the
house? Would a farmer or elevator manager know that? Would you
know that, Mr. Tofteland?
Mr. Tofteland. I had no idea.
Senator Harkin. Did you know, Mr. Blew?
Mr. Blew. No.
Senator Harkin. Now, Mr. Hainline probably knew because you
have a futures commission.
Mr. Hainline. It is possible to know, but it is very
difficult to find out what the specifics are, Senator.
Senator Harkin. Well, do you believe it would affect the
decisions of customers, Mr. Tofteland and Mr. Blew, if you knew
how and with whom they do business if the futures customers
knew that the merchants were able to invest and move around
these customer funds? Would that maybe affect with whom you
dealt?
Mr. Tofteland. It certainly would if I knew that----
Senator Harkin. Would transparency help?
Mr. Tofteland. It would. If I had any idea that what was
going on there----
Senator Harkin. Well, let me ask one last question-- maybe
not quite the last. I see a little more time left. Do you
believe it would be better if customer funds could only be
invested in treasury securities or cash, as I understand is
required by the Securities and Exchange Commission as to
securities brokers and dealers? I am just asking. I am saying,
Should we go back to where we were pre-2000?
Mr. Tofteland. Well, those investments seem a lot more
secure than the latter.
Senator Harkin. I will read them to you: treasuries,
municipals, and obligations fully guaranteed by the U.S. Would
that give you a little bit more----
Mr. Tofteland. I understand those,
Senator Harkin. You understand those, sure. We understand
those. I am not certain I understand what in-house transactions
are and purchase and repurchase agreements and how they shuffle
this money back and forth. And I think that is part of this
whole deregulation effort, was to put a cloud in there. It is a
cloudy kind of thing. No one really knows what is going on and
how these monies are being used. Quite frankly, these merchant
houses are using the money to make a profit. I cannot say I
blame them. They got a bunch of money, and they see some unique
investments they can make, why not go ahead and do it? Because
their argument to us--believe me, I have been involved in this
since they first came and wanted to get rid of the Glass-
Steagall Act, which I was one of seven members to vote against.
Ever since they got rid of Glass-Steagall, all we hear about
is, well, if they can just use these funds and invest it in
these things, they make a little profit and, therefore, they
become more efficient in handling your money, you see. And that
is the argument that has been used here for the last 12 years.
And the Congress continually just says, okay, fine, just fine,
just keep deregulating it.
Well, I guess I would just ask: Doesn't the MF Global
disaster illustrate the unavoidable conclusion that we must
have strong, transparent regulations for the protections of
customers and the public? Mr. Blew? Or do you want to just live
with this nice big deregulation and take your chances, roll the
dice?
Mr. Blew. No, you know, I cannot speculate. I guess what I
would--the only response I would have to that is I do believe
that we have regulations in place, and I am not sure that they
were enforced.
Senator Harkin. Yes, we have regulations in place. They can
invest in all these things. I am asking you, Should they be
able to invest in all that stuff?
Mr. Blew. I am going to let you figure that out, Senator.
Senator Harkin. Well, no, I mean, you are at the bottom end
of this. Mr. Tofteland, should they invest in all these things
and not even let you know what they are investing in?
Mr. Tofteland. Well, I do not agree that--I personally
would not have invested in some of that, so if they took the
funds that I entrusted there and did that, I do not think that
should be the case. As far as the regulation goes, that would
be something for the CFTC and your Committee to look at.
Senator Harkin. Mr. Hainline, any view?
Mr. Hainline. I tend to agree with you, Senator. If I
wanted to make those kind of investments, I would either buy
them myself or invest in the company's--the stock of a company.
If I have got segregated funds that I need to have secure, that
is not the purpose.
Senator Harkin. Very good. I agree with you.
Mr. Hupfer?
Mr. Hupfer. Senator, I agree that they should be segregated
funds and only safe investments, there would be more
disclosure. We were not aware that our money was being invested
in these transfers or any of this type of thing was going on. I
guess that is how I feel.
Senator Harkin. Thank you.
Thank you, Madam Chair.
Chairwoman Stabenow. Thank you very much.
Senator Boozman?
Senator Boozman. Thank you. We appreciate you all being
here. You all are farmers, and you all are used to taking
risks. I think you can argue as to what is appropriate or not,
but I would like to follow up on Senator Harkin in the sense
that, again, based on the materials that were presented to you
as you were sold, you know, whether or not to do this, did
you--I just want to be clear. You felt like you did not
understand the risk that you were getting into. Is that
correct? You did not realize that the funds could be
segregated, that you could lose your money in this manner?
Mr. Tofteland. That is correct. I was just assuming that
would be--it is something that has been done and trusted for
100 years.
Senator Boozman. I have got the CME, Clearing Financial
Safeguards, you know, and this is a lot of information. But
when you read through it, it does appear that things are pretty
secure. So that is a fair statement, because, again, we can
argue as to what is appropriate and what we need to do in the
future. But at the very least, you know, you need to be aware
as you get into a deal, you know, what is at stake, what the
risks are, and it seems very apparent that was not the case.
Again, thank you very much for being here.
Chairwoman Stabenow. Thank you very much.
Senator Brown?
Senator Brown. Thank you, Madam Chair. Thank you for
holding this hearing, and I appreciate especially the comments
from all of you. I just arrived, but I saw your testimony and
appreciate your comments about needing to build confidence. And
Senator Harkin's comments especially were important. You know,
it is not often we have an opportunity, I think, to see--to put
a face on decisions made by people in this town, and that is
particularly important in this hearing, especially the two
gentlemen on the right. It is an important reminder that the
actions of Congress and watchdogs like SEC, like CFTC, have
real-world consequences.
Like most States, Ohio is home to companies that have
fallen victim again to the culture of recklessness and greed.
In Upper Sandusky, a town about 40 miles west of where I grew
up, a feed and pork producer, Kalmbach Feeds, uses a commodity
broker who uses MF Global. When they heard that MF Global was
experiencing difficulties due to risky bets on European debt,
they tried to withdraw their funds and could not. A metal
refinery in southeast Ohio, in Appalachia, Ohio Precious
Metals, was told their money was safe. Now both these companies
are stuck in limbo as the CFTC and CME search for $1.2 billion.
They are the latest of the victims of Wall Street fraud and
greed and whatever other adjectives we want to use.
Let me, before my question, put a little bit of historical
context. In 2000, the CFTC relaxed its Rule 1.25 restricting
how companies can invest client funds, a giant change that
helped create the conditions for MF Global's failure. That same
year, Congress passed a law preventing regulation of over-the-
counter derivatives, which then grew to a $464 trillion market
in the first half of 2008. Last year, the SEC brought charges
against Goldman Sachs for selling its clients' mortgage bonds
that it knew were doomed to fail, then betting against those
very bonds, as you have read by now.
One of these misguided policies hurt investors; another
caused a catastrophe for our Nation's economy; the third did
both.
These episodes demonstrate that rules and accountability
must keep pace with developments in the markets. Last year,
Dodd-Frank included what is the now famous Volcker Rule to ban
banks from making risky proprietary trades for their own
accounts, just like those made by MF Global. We passed this
provision because these bets are dangerous and because they pit
banks against their own customers. And when that happens, the
customer always loses. Unfortunately, efforts like the Volcker
Rule are met with powerful opposition from powerful special
interest lobbyists in this town.
Wall Street and its allies in Washington are seeking to
prevent implementation of the important reforms we passed last
year. They are seeking to defund not only they wanted to weaken
regulations further, as Senator Harkin said; they are seeking
to defund agencies that watch over financial markets. So as Mr.
Blew--as you both said, we are not able--you know, that these
rules may have been on the books. They were not carried out
partly because Wall Street allies in this town and in this
Senate want to defund these agencies so that even if the rules
are in place, there is not the money to enforce them.
Finally, these same interests blocked the appointment just
last week of the Director of the new Consumer Financial
Protection Bureau, somebody I have known for 20 years from
Ohio, Richard Cordray, whose sole mission was to protect Main
Street against these kinds of Wall Street abuses. And unlike
ever in Senate history, he was blocked not because he was not
qualified but because more than 40 Senators here, allied with
Wall Street, did something they had never done before. They
blocked a nominee because they did not like the agency, even
though the agency had been created by an act of Congress with
more than 60 votes, a supermajority, 2 years later.
Markets require transparency and clear rules of the road
for all participants and accountability when those rules are
broken. Watchdog agencies need adequate resources to prevent
unscrupulous Wall Street actors from again taking advantage of
farmers and small manufacturers in my State and across the
country. It puts companies in States like mine at risk that
rely upon these markets to deal with business predictability to
smooth out the busts and the booms.
So here is my question for each of the four of you,
starting with Mr. Blew on the right: What would you say to
those who, one, want to defund the regulators; two, want to
weaken the regulations; three, fail to confirm somebody that
would be a consumer watchdog--pardon my mixed metaphor but
would be a cop on the beat for consumers? What do you say to
those politicians and regulators that seem so little interested
in protecting Main Street? Mr. Blew?
Mr. Blew. Well, I cannot--again, I cannot speculate whether
or not we need to regulate, deregulate, overregulate, whatever
we need to do. I just know that we need confidence in the
system to be able to manage risk, and so however we achieve
that, that is fine. But whatever rules we do have in place or
have in place in the future, we need to ensure that they are
enforced.
Senator Brown. Okay. Mr. Tofteland?
Mr. Tofteland. I do not know if it is an issue so much here
whether it is left or right. It is really an issue of what is
right or wrong. And I think we can go ahead and build a bigger
fence. But if we have--and as long as we have the guy that
builds the fences or people that build the fences show the cows
where the holes are at, you could build the biggest fence in
the world and it will not work. So I think we have maybe a
problem with some big cows.
Senator Brown. Well put.
Mr. Hainline. I think your point on efficient transparency
is very important. I think oversight is really key. The reason
we are here today is this Committee has oversight over this
area, and so I think oversight in anything the Government gets
involved in is key. And so with respect to your question, I am
not sure what the oversight of those other positions are.
Senator Brown. Mr. Hupfer?
Mr. Hupfer. I guess I feel we need to enforce the
regulations that are in place. I think Mr. Harkin made some
good points about what can be invested, where the money can be
invested, whether it is safe investments, and transparency is a
huge issue. I think this body--like I said, as we move forward,
that is why we are here, to get some answers and to try to come
to some kind of a resolution on this.
Senator Brown. Thank you.
Thank you, Madam Chair.
Chairwoman Stabenow. Thank you.
Senator Chambliss?
Senator Chambliss. Thanks, Madam Chair.
I understand that, gentlemen, you all have testified that
you were not aware of the use by MF Global--whether they did so
or not, but you were not aware of the use by them of your funds
to carry out proprietary trades. Is that a fair statement from
all four of you?
[No response.]
Senator Chambliss. So my question is: What would you have
done if you had known that? What do you think your recourse
rights are? And what would you have done if you had somehow
been advised that they were using your funds for proprietary
trades? Mr. Hupfer, let us start with you.
Mr. Hupfer. Well, I guess Mr. Lugar made the point that it
is a risky world. I think that any good businessman would
spread his risk, probably open an account at another clearing
firm, maybe more than one account, and kind of divide your
capital or spread your risk in that manner.
Senator Chambliss. Okay.
Mr. Hainline. If the degree of leverage had been known, as
has come out subsequent, I am sure we would not have been
clearing MF Global.
Mr. Tofteland. I just want to say that businesses are going
to continue to fail, and when a business fails, customer assets
have to be preserved and have to be--this has happened before
in this industry. Companies have failed. Customer assets have
transferred the next day, and we went on his business. In this
case something else happened, and that is what we ought to look
into.
Mr. Blew. Well, without a doubt we would have spread the
risk to other futures commission merchants,
Senator Chambliss. My point in asking that is that as we
move forward, I wonder if there ought not to be some measure by
which a customer like the four of you would be made aware of
such a transaction. And it is easy to look back and see now
what you would have done, but I think I hear all of you saying
you would not have been happy with the fact that there were
proprietary trades using your money.
Lastly, and if this has been asked, I apologize, but I come
from ag country, too. I know how hard it is in these times to
get funding for your operating loans, and this is that time of
year when farmers are negotiating for operating loans. What
kind of impact has this had in your respective parts of the
country with your customers? Again, Mr. Hupfer, let us start
with you.
Mr. Hupfer. Well, at this point in time, in terms of us
being a commercial agribusiness, in terms of financing for
farmers, I do not think that is really--I do not think we have
the real true answer on that yet. I do not think we are far
enough along with this. I have talked to some of the lending
institutions, and I think everybody is just trying to see how
this plays out. I guess I would defer maybe over to Mr. Blew
and Mr. Tofteland on that.
Mr. Tofteland. Well, I have yet to speak with my banker in
detail. After this hearing when we get back, we will talk some
more. He has assured me that he is with us 100 percent and
wants to work with us in the future. You know, in my case we
will have to borrow more money.
Mr. Blew. Well, I think grain as a lender was always seen
as a secure bet, and I believe that if we do not restore the
confidence in the system, that could come into question. It is
fairly simple math right now. Our lenders puts working capital
requirements on us of seven times the number, and so you take
the number that we have lost and take it times seven, and that
is what we are out as far as what we can borrow.
Senator Chambliss. Thanks, Madam Chair.
Chairwoman Stabenow. Thank you very much.
Senator Gillibrand?
Senator Gillibrand. Thank you, Madam Chairwoman, for
holding this hearing. Thank you, Mr. Ranking Member. Thank you
all for giving us your testimony.
The questions that I had have been asked, and I appreciate
the time you have taken to brief this Committee, and I will
reserve the remainder of my questions for the next panel.
Thank you very much.
Chairwoman Stabenow. Thank you very much.
Senator Hoeven?
Senator Hoeven. Thank you, Madam Chairman.
I know this line of questioning has been asked. I would
like to go into it for just a minute. But, again, it goes to if
the company was not dipping into customer accounts, segregated
accounts, how could the customer account or the segregated
account come up short, in your opinion? Is there any way those
accounts could have been short unless that was happening? And I
would start with Mr. Hupfer and also ask Mr. Hainline to
respond to that as well.
Mr. Hupfer. Could you--I guess your question is how could
we have known that they were----
Senator Hoeven. No, no.
Mr. Hupfer. I am sorry.
Senator Hoeven. In your opinion, if MF Global was not
taking dollars out of those custodial accounts or dipping into
those custodial accounts for company purposes, how would
customer accounts come up short? In your opinion, is there some
other way other than the company going into those accounts?
Mr. Hupfer. I guess I do not see how there would be any
other way.
Senator Hoeven. That is my question.
Mr. Hainline. It is either sloppy recordkeeping or it is
theft.
Senator Hoeven. And was there any indication at any time to
you that customer accounts were being used for company
purposes, any indication, any reporting to you at any time?
Mr. Hupfer. No.
Mr. Hainline. No.
Senator Hoeven. Did you try to withdraw dollars at any time
when you realized MF Global was having trouble? Or at what
point did you try to withdraw dollars, and what was the
reaction? Were you stopped, not stopped? What was the
communication?
Mr. Hainline. Towards the last of the week that they were
trading, lots of smoke in the situation. To transfer positions,
normally the positions transfer one day and the money transfers
the next day. If you are an FCM that would be accepting these
new positions, your risk is you get these new positions in a
transfer and the funds are frozen the following day, and that
chilled many FCMs from accepting transfers at the end of this.
So it was another result of this problem.
Senator Hoeven. So by the time you were made aware of the
problem or the magnitude of the problem, you really did not
have an ability to withdraw customer funds?
Mr. Hainline. Well, that is the reason there are so many
bounced checks out here.
Senator Hoeven. Mr. Hupfer, anything?
Mr. Hupfer. I would say that is correct. We had no
knowledge, we would not have that ability. There was no
opportunity to do that.
Senator Hoeven. To Mr. Tofteland and Mr. Blew, is your
understanding still that you will receive 72 percent of your
account, either directly or transferred to another company?
Mr. Tofteland. That is my understanding.
Senator Hoeven. And you have not had any communication
beyond that?
Mr. Tofteland. Not beyond that. Just that they are looking
at--or the trustee and the judge have worked to get it to 72
percent. Beyond that I am not sure what will happen. I want to
make sure--I do not want to see that our customer funds are
thrown into the pool with the creditors because if there is $40
billion at the holding company level and they liquidate the
FMCI down here or MF Global, Inc., you know, there should be
funds available. We should be made whole immediately. We would
not be here if that was the case.
Senator Hoeven. Absolutely, and I absolutely understand how
important that is. So at this point the indication to you from
the trustee is 72 percent of your funds would come back to you.
Any indication of timeline and any further indication on this
issue of whether customer funds have a priority versus bond or
equity holders?
Mr. Tofteland. I wish there was more transparency in that
process. I wish that we could look at--I wish the trustee would
released where the money is at that he has found already so we
could at least find out if it is at JPMorgan Chase or if it
is--I mean, where it is at. It would be nice to see some
transparency in that process. You know, maybe it just an issue
of understanding. I hope is not a conflict because it is kind
of confusing how this all works, but in any bankruptcy, when
you have customer funds, in any business, it has got to be kept
separate. It is like if I bring my pickup to the car dealership
to get the oil changed and over the weekend they close the
doors, the bank comes in, and the next day they put my pickup
on the lot with the cars that are going to be foreclosed on,
and, you know, my pickup is my pickup. So it is customers. So
it really should not be an issue.
Senator Hoeven. Well, transparency, understanding how they
are going to approach this issue, and then also timeline,
knowing when you are going to have use of your dollars, all
these are important.
Mr. Tofteland. Exactly. I have no idea. Maybe 3 weeks,
maybe 4 weeks, but no idea for sure on my particular case.
Senator Hoeven. And that is important information for you
and for other producers.
Mr. Blew, same questions.
Mr. Blew. Well, I would be the same way. We have not heard
anything officially. We know that is what has been proposed,
but nothing official as of yet.
Senator Hoeven. And how is that communication being
provided to you?
Mr. Tofteland. In my case, working with the Commodity
Customer Coalition, and they represent 8,000-some customers
now, farmers, ranchers, elevators, and individual people, so
that is where I get my information recently, and working with
them.
Senator Hoeven. And, Mr. Hupfer and Mr. Hainline,
communication to you and your ability to communicate with your
customers, could you just touch on that?
Mr. Hupfer. Communication-wise and working with Advanced
Trading, Mr. Hainline's company, has been great. They have kept
us abreast of the situation so we have some kind of an idea
what to tell our customers. Right from the get-go, they were on
top of this, and I give them high marks for that.
Mr. Hainline. The trustee's website has a lot of
information. The CME has done a good job of putting out
information. There has been a number of media reports. So, you
know, those are the areas that we are able to get information
from.
Senator Hoeven. With customer dollars tied up, though, for
your farmers and ranchers, what are they doing? How are they
operating without those dollars?
Mr. Hainline. They are probably having to ration their risk
management activities. They are performing less risk management
than they would have otherwise. So they are taking more risk
because they do not have the assets there that are tied up.
Senator Hoeven. Mr. Hupfer.
Mr. Hupfer. I would agree with what Mr. Hainline said.
Senator Hoeven. Thank you, gentlemen, for coming in. We
appreciate it very much.
Chairwoman Stabenow. Thank you very much.
Senator Conrad, did you have questions?
Senator Conrad. You know, in the interest of time, given
the lateness of the hour, let me just say what an excellent
panel this has been. We very much appreciate your willingness
to come forward and state publicly what has happened to you.
You certainly have our sympathy. We are hopeful that before
this is over there will be 100 percent recovery. Certainly that
is what you deserve. And I think this Committee will be very
focused on trying to make certain that you get every dime back
that you put in customer accounts that should not have been at
risk.
I thank the Chair.
Chairwoman Stabenow. Thank you very much. I think everyone
on this Committee absolutely agrees with that statement.
I notice that Senator Nelson has just joined us. Senator, I
do not know if you have questions as we are wrapping up this
panel.
Senator Nelson. No. I think most of the questions have been
asked. I will wait for the next panel. Thank you, though, Madam
Chair.
Chairwoman Stabenow. Thank you very much.
Thank you again to each of you for traveling here to be a
part of this, and I want you to know that we are laser-focused
on doing everything in our powers to make sure you get your
money back. So thank you very, very much, and we would excuse
you and ask our next panel to come forward. We will take a
moment as we change panels. Thank you.
[Pause.]
Chairwoman Stabenow. Thank you very much for joining us for
this very important hearing. Let me introduce our witnesses.
First, our first witness is Mr. Jon Corzine. Mr. Corzine is
the former Chairman and CEO of MF Global Holdings. Before
becoming CEO of MF Global, Mr. Corzine was the Governor of New
Jersey from 2006 to 2010. Prior to serving as Governor, Mr.
Corzine served as a Senator from New Jersey. From 1975 to 1999,
he worked for Goldman Sachs as a bond trader, eventually
becoming chairman and CEO.
Next we have Mr. Bradley Abelow, president and chief
operating officer at MF Global. Prior to joining MF Global, Mr.
Abelow was a founding partner of New World Capital Group.
Before co-founding New World, he was chief of staff to Governor
Corzine.
Lastly, we have Mr. Henri Steenkamp, chief financial
officer for MF Global. Before joining MF Global, Mr. Steenkamp
spent 8 years with PricewaterhouseCoopers, including four years
in the New York office as part of its transaction services
group where he managed a variety of capital-raising
transactions on a global basis for multinational companies. Mr.
Steenkamp is also a chartered accountant.
As with our previous panel, we would ask that you rise so I
could administer an oath and ask that you raise your right
hand. Do you swear that the testimony you are about to present
is the truth, the whole truth, and nothing but the truth, so
help you God?
Mr. Corzine. I do.
Mr. Abelow. I do.
Mr. Steenkamp. I do.
Chairwoman Stabenow. Thank you very much.
At this point we will welcome Mr. Corzine.
STATEMENT OF HON. JON S. CORZINE, FORMER CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, MF GLOBAL HOLDINGS LTD., NEW YORK, NEW YORK
Mr. Corzine. Thank you, Chairwoman Stabenow, Ranking Member
Roberts, and distinguished members of the Committee. The
statements of the previous panel pretty powerfully confirm the
harsh fact that MF Global's bankruptcy has devastated people's
lives and undermined confidence in markets. I recognize that my
concerns about their anguish and loss of confidence does not
provide solace for those losses or hardships, and that is true
whether those hurt are customers, employees, or investors.
As the chief executive officer of MF Global--and I say this
with all sincerity--I truly apologize to all those affected.
As you know, I have provided a written statement to the
Committee, and I testified before the House Committee on
Agriculture last week. 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.
Several of the questions last week concerned whether I was
aware of any money that belonged to customers being used
improperly. I tried to answer those questions to the best of my
ability, but I want to be clear. I never gave any instruction
to misuse customer funds. I never intended anyone at MF Global
to misuse customer funds.
I also want to address the missing money. Again, as I said,
I was stunned to learn that hundreds of millions of dollars of
funds were unreconciled on Sunday evening, October 30th. And
while people worked very hard into Monday morning to reconcile
the accounts, ultimately their efforts were unsuccessful.
I note that in response to questions about the whereabouts
of the missing funds, both CFTC Commissioner Sommers and the
SIPC trustee explained that, to trace missing funds, it will be
necessary to analyze and reconcile multiple hundreds of pages
of daily transactions, multiple bank statements from many
countries, and to review account records of more than 38,000
customers. In the ordinary course of business while I was at MF
Global, I would not have seen those records, and I have no
access to them now.
What I do know is that over the last days at MF Global I
was focusing on selling the company and liquidating assets so
that there would be adequate cash and resources to handle what
ultimately became a run on the bank.
For example, on Thursday I directed the sale of
approximately $1.3 billion in commercial paper in order to meet
anticipated customer demands. I also directed the sale of
hundreds of millions of dollars of MF Global proprietary
assets. On Friday I directed sales of other assets, including
approximately $4.5 billion of Government agency bonds and
attempted to sell other securities.
As I sit here today, I do not know whether all of these and
many other transactions were properly recorded and effectuated,
or whether banks and other counterparties involved in such
transactions properly credited the right accounts for these
sales, or are holding money that is rightfully due to either MF
Global or its customers. Nor do I know whether the back-office
professionals at the firm or at other institutions made errors
or miscalculations under the extraordinary stress.
Questions have also been raised about the compliance and
risk systems at MF Global and the controls on segregated funds.
During my tenure we employed, including many new hires, dozens
and dozens of highly regarded and trained professionals in the
areas of risk, finance, compliance, legal, internal audit, and
back-office operations. We also retained prominent outside
auditors, consultants, and lawyers to make sure MF Global
operated lawfully. Indeed, until Sunday night before the
bankruptcy, I believed that the people and systems at MF Global
were properly protecting client funds.
For example, on the Friday before the bankruptcy, JPMorgan
Chase contacted me and others at the firm about certain
overdrafts and whether funds had been transferred in compliance
with CFTC rules. I had no personal knowledge about the issues,
so I asked people, senior people in the back-office in Chicago
and Legal Department to become directly involved in resolving
these issues. So even in the midst of the chaotic last days of
business, I had confidence in our people and systems.
So before I respond to your questions, I want to say again,
I apologize to our customers, the farmers and ranchers, the
gentlemen that we saw here today, and the people they represent
in the real world, our employees and our investors. My pain,
and my embarrassment, do not blind me to the fact that they
bear the brunt of the impact of the firm's bankruptcy.
I am willing to respond to the Committee's questions.
[The prepared statement of Mr. Corzine can be found on page
101 in the appendix.]
Chairwoman Stabenow. Thank you very much.
Mr. Abelow?
STATEMENT OF BRADLEY ABELOW, PRESIDENT AND CHIEF OPERATING
OFFICER, MF GLOBAL HOLDINGS LTD., NEW YORK, NEW YORK
Mr. Abelow. Madam Chairwoman, Ranking Member Roberts,
members of the Committee, thank you for having me here today.
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 either 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,
I am deeply sorry for the hardship they have all endured. While
I know that 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 2010 as chief operating
officer. I was given the additional title of president in March
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 in 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 rating. Third, the company
reported disappointing earnings on October 25. 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,
dramatically reducing 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, 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 of 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, and 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 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, and the firm has attempted to be as open
and transparent as possible. I hope I can provide some
assistance to the committee in its investigation today.
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 services 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
96 in the appendix.]
Chairwoman Stabenow. Thank you very much.
Mr. Steenkamp?
STATEMENT OF HENRI J. STEENKAMP, CHIEF FINANCIAL OFFICER, MF
GLOBAL HOLDINGS LTD., NEW YORK, NEW YORK
Mr. Steenkamp. Chairwoman Stabenow, Ranking Member Roberts,
and distinguished members of the Committee, thank you for this
opportunity to make this brief statement. My name is Henri
Steenkamp, and I am the chief financial officer of MF Global
Holdings Limited, a position I have held since April of this
year.
Let me say at the outset that I am deeply saddened, upset,
and frustrated that money belonging to MF Global Inc.'s
customers has been frozen or is missing. I know, however, that
my reactions cannot be compared to those of the people who are
suffering with this issue. Along with certain other senior
executives of MF Global Holdings Limited, I have remained at my
post following the bankruptcy filing, and I am working
diligently to do what I can to maximize the value of the firm
for all interested parties. That said, because of the SIPC
trustee's rules and policies, I unfortunately have not been
able to participate in the current efforts to find the missing
funds.
While I am deeply distressed by the fact that customer
monies have not yet been fully accounted for, I unfortunately
have limited knowledge of the specific movement of funds at the
U.S. broker-dealer subsidiary, MF Global Inc., during the last
2 or 3 hectic business days prior to the bankruptcy filing.
This is in part because of my global role and in part because,
during those days, I was taken up with other serious matters.
As the global CFO, I had many different functions, but
principal among them was the effort to, one, ensure that the
holding company's consolidated financial accounts complied with
all U.S. accounting and reporting requirements; and, two, to
work closely with our investors and our rating agencies.
As its name suggests, MF Global Holdings Limited, my
employer, is a global holding company with approximately 50
domestic and foreign subsidiaries. Each of the regulated
subsidiaries generally had its own or a regional chief
executive officer, chief operating officer, chief financial
officer, and others obligated to independently discharge the
customary duties of those offices according to its home
jurisdiction's regulatory requirements. All of these positions
were filled by highly experienced professionals. Direct
involvement with operational matters such as bank accounts or
fund transfers has never been part of my duties.
It is, of course, important to understand the way in which
segregation issues were handled at MF Global Inc., the
subsidiary that acted as a futures commission merchant in the
ordinary course of business. To avoid confusion, where it is
necessary to specifically refer to MF Global Inc., I will call
it ``MFGI'' in my statement.
MFGI held all U.S. FCM customer funds required by law to be
segregated, and all segregation calculations were performed by
experienced MFGI personnel in Chicago overseen by MFGI finance
professionals. To my understanding, MFGI's segregation of
client funds has been reviewed repeatedly by the firm's outside
auditors and regulators over a long period of time.
As a general matter, I was not involved with the details of
the segregated funds in the course of my duties as global CFO,
nor with the complex segregation calculations performed by MFGI
in Chicago and reported to regulators on a daily basis.
The week prior to the bankruptcy filing saw, among other
things, multiple rating agency downgrades in quick succession,
extraordinary liquidity stresses, and efforts to sell all or
part of the firm. It was a time of constant pressure and little
or no sleep, with a significant number of critical issues to
resolve.
As the CFO of the holding company, my attention was
appropriately focused on crisis management and strategic issues
relating to the sale of the company. On Monday, October 24th,
Moody's announced it was downgrading MF Global's credit rating
by one notch, leaving the firm with the lowest possible
investment grade rating. This was followed by further
downgrades throughout the week, the speed and severity of which
were unprecedented in my experience and placed extraordinary
pressure on the firm's liquidity.
As the situation deteriorated, the sale of the FCM business
and/or the firm was pursued. In between my dialogue with the
rating agencies, I dedicated my time to the daunting task of
facilitating the due diligence necessary for an acquisition or
asset sale almost exclusively in the period commencing on the
evening of October 27th and ending with the decision to file
for bankruptcy on the morning of October 31st.
On Sunday night, October 30th, when a deal for the
acquisition of all or part of the company appeared to be close
at hand, I first learned of a serious issue with MFGI's
segregated fund calculations. Unfortunately, as the Committee
is aware, the efforts to reconcile segregation calculation were
not successful, and the deal fell through, and I along with
others from MF Global promptly notified our regulators about
the segregation issues.
I understand that the Committee, MFGI's customers, and the
public have many unanswered questions about the customer funds.
I share many of these questions, and I am personally extremely
frustrated and distressed that they remain outstanding and that
client funds are missing.
I would be pleased to answer the Committee's questions.
Thank you.
[The prepared statement of Mr. Steenkamp can be found on
page 151 in the appendix.]
Chairwoman Stabenow. Thank you very much.
First, for the information of the members, we will be
breaking, understanding there is business that will be done at
the caucus lunches, so we will break about 1 o'clock and come
back at 2:15 to continue. We have much to do today, but we will
take that opportunity to break.
First, Mr. Corzine and Mr. Steenkamp, on May 20, 2011, you
both signed certificates required by Sarbanes-Oxley legislation
assuring that MF Global's internal controls over financial
reporting were accurate, and I have copies of that. And I am
wondering, given what you know today and the $1.2 billion
potentially in customer funds that are missing, would you sign
this document again? Mr. Corzine?
Mr. Corzine. Senator, given what we know today, you would
not sign that document because you would not have had the
assurances of the people, the systems, the procedures verified
by all of those that were responsible for internal confirmation
that the data was accurate. And, clearly, as has been repeated,
there is certainly some amount--$1.2 billion or $600 million,
different numbers--of dollars that are unreconciled with regard
to segregation accounts.
Chairwoman Stabenow. Mr. Steenkamp, would you sign this
document again?
Mr. Steenkamp. Senator, I think knowing what we know today,
again, at this point in time, and knowing that there are
missing customer funds from what we understand, I would not be
able to sign that. But, you know, prior to this point, there
were controls that, as far as I was aware, had not operated--
that had not operated before this point in time.
Chairwoman Stabenow. You know, it is very difficult
listening to the chief financial officer or the CEO or the COO
indicating surprise that there were not adequate controls on
the management of the money. I guess what we heard on the first
panel was very simple. Where is the money? I mean, how do you
answer that? Where is the money from funds that were supposed
to be kept separate, customer money?
Mr. Steenkamp, as CFO, where is the money?
Mr. Steenkamp. Senator, unfortunately, I do not know where
the money is.
Chairwoman Stabenow. Well, who does?
Mr. Steenkamp. Well, Senator, part of my job was not to
approve transfers of client funds. It was not to be involved in
the process of client funds. Those operational aspects occurred
at MF Global Inc. as well as at all the other regulated
entities around the world, and we had experienced senior
officers executing those operational controls.
Chairwoman Stabenow. Mr. Corzine, where is the money?
Mr. Corzine. Senator, enormous numbers of transactions were
taking place in those very final days--I tried to put that in
my statement--about the 38,000 customers, the many countries,
and those need to be parsed through to arrive at an answer. We
need the facts on that. It is not only from those of us who do
not see those records, but even from the people who now have
those records, it is a very, very difficult task.
Many of us had reasons to believe when we signed statements
like you presented that we had the people, the policies, and
the procedures in place to give assurance. We would not have
signed those on May 20th or other times while we were there if
we did not feel those were secure. At the time that occurred on
that Sunday evening, October 30th, it is clear that something
was amiss, and that needs to be discovered what that was based
through all of those transactions that I tried to outline.
Chairwoman Stabenow. Okay. And, Mr. Abelow, for you as
well, where is the money? We are looking at the top three
people of the company who are responsible for the overall
internal controls of this company. And so, Mr. Abelow, where is
the money?
Mr. Abelow. Senator, as I said in my statement, I do not
know where the money is. As of the filing of bankruptcy on
October 31, investigations were commenced by a number of
investigative authorities under the direction, presumably, of
the SIPC trustee who has been put in place, and we have not had
access to the results of that investigation or any information
about the status of that investigation.
I am as anxious as you are to hear the results of that
investigation and be able to answer the question.
Chairwoman Stabenow. Well, let me ask, did any of you
authorize, approve, or know of money transfers from customer
segregated accounts to the firm's broker-dealer accounts in the
final days or weeks of MF Global or before then? Mr. Corzine?
Mr. Corzine. Senator, as I said in my opening remarks, I
never directed anyone at MF Global to misuse customer funds. I
never intended to, and as far as I am concerned, I never gave
instructions that anybody could misconstrue.
Chairwoman Stabenow. So you are saying you did not
authorize, approve, or know of fund transfers?
Mr. Corzine. Well, in a general sense, there are all kinds
of fund transfers that are taking place. Anytime there is a
sales of $1.3 billion worth of commercial paper, there will be
fund transfers associated----
Chairwoman Stabenow. I am talking about between broker-
dealer accounts, though, and when we are looking at leading
up--you know what I am asking in terms of the final weeks
Mr. Corzine. That is why I am trying to be very direct in
saying there is no direct authorization. I was not aware that
the unreconciled accounts existed until that Sunday evening
that we talked about.
Chairwoman Stabenow. Mr. Abelow, did you authorize,
approve, or know of money transfers from customer segregated
accounts to the firm's broker-dealer accounts in the final days
or weeks of MF Global?
Mr. Abelow. Senator, to the best of my recollection, I do
not recall participating in any conversation about the use of
customer funds, customer segregated funds or assets for any
purpose other than what they were intended to be used for.
Chairwoman Stabenow. Mr. Steenkamp?
Mr. Steenkamp. Senator, I did not authorize, approve, or
know of any transfers of customer funds for any house or
broker-dealer purposes.
Chairwoman Stabenow. Thank you very much.
Senator Roberts?
Senator Roberts. Well, thank you, Madam Chairwoman.
Mr. Abelow, as the COO, the employees responsible for
executing transfers of money ultimately report to you and you
report directly to Governor Corzine. Is that correct?
Mr. Abelow. Senator, I am not sure if you--when you framed
your question--if you could repeat it for me, I would
appreciate it.
Senator Roberts. Well, let me put it another way. Do
treasury operations and security operations ultimately report
to you?
Mr. Abelow. Yes, they did through a chain of authority.
Senator Roberts. All right. Mr. Steenkamp, as the CFO, did
MF Global instill internal conduct controls for how and where
money could be moved?
Mr. Steenkamp. Yes, there were controls implemented in MF
Global Inc. and all of our subsidiaries.
Senator Roberts. Is it possible for those conduct controls
to be overruled?
Mr. Steenkamp. To the best of my knowledge, these controls
were operated and the approvals were resident in the legal
entities. So I do not believe so, no.
Senator Roberts. You do not believe that. But is it
possible?
Mr. Steenkamp. I would not want to speculate, Senator.
Senator Roberts. Mr. Abelow and Governor, is it correct
that at the end of each trading day MF Global, like other FCMs,
would receive margin calls?
Mr. Corzine. There was twice-a-day settlements of margin
calls, if I am aware of how the process goes.
Senator Roberts. Mr. Abelow?
Mr. Abelow. I believe it was typical that MF did receive
margin calls.
Senator Roberts. Did MF Global receive margin calls or
other requests for liquidity on Friday, October 28th? For both
of you, Mr. Abelow and Mr. Corzine--I am sorry. Governor
Corzine.
Mr. Corzine. Senator Roberts, I believe there were margin
calls, as there are on almost every day.
Senator Roberts. Well, you indicated publicly, I think,
that $4.5 billion went out the door.
Mr. Corzine. I have repeatedly said that there was $4.5
billion worth of U.S. Government agencies sold on that day.
That was a sale that was designed actually to produce margin
coming back to the firm as opposed to margin going out the
firm.
Senator Roberts. We have heard a lot of 35-cent words being
tossed around, something called ``rehypothecation.'' That is a
big word even here in Washington, not to mention Dodge City. We
may not understand the ins and outs of it, but two things we do
understand are margin calls and chain of command. We know
customer money was accounted for on Wednesday, the 26th.
Friday, the 28th, the firm's cash flow situation was dire, and
the demands for cash kept coming in.
Mr. Abelow and Governor, is it the case that MF Global did
not have enough cash on hand to cover the cash needs that came
in late Friday?
Mr. Corzine. Senator, from all reports that I had received,
to my recollection, on that day we were able to meet our cash
demands.
Senator Roberts. Mr. Abelow?
Mr. Abelow. I do not recall being made aware of our running
out of cash on Friday, the 28th, of being unable to meet
obligations.
Senator Roberts. As a captain in the Marines--and,
Governor, you were in the Marines--I knew that if a full-bird
colonel told me to do something, I would probably do it. Now,
if a two-star general gave me an order, I sure would not ask
any questions. So could it be possible that one or more of your
operational money movers who reported to you, Mr. Abelow, and
you, Governor, was told to cover the liquidity needs or margin
calls overwhelming the firm's cash flow by taking money out of
the segregated customer accounts? Governor?
Mr. Corzine. Senator, I do not believe that anyone would
operate that way. We had no experience in the 19 months that I
had been there that anyone had overridden those systems. And so
I have no reason to believe that occurred in those last hours.
Senator Roberts. Mr. Abelow?
Mr. Abelow. Senator, I cannot speculate about conversations
that I did not see or participate in. I can only tell you that
I do not recall participating in any conversation about a use
of customer funds or customer assets other than for their
intended purposes.
Senator Roberts. As I stated in my opening remarks, the CME
knew on or before Wednesday, November 2, that MF Global was
attempting to hide something. In fact, didn't MF Global
leadership even go so far as to request and receive an actual
plan that would break the glass and tap into your customer
segregated accounts, perhaps described as a loan, if such a
scenario arose?
Mr. Corzine. Senator, there certainly were contingency
plans that I think fall under the rubric that you were talking
about, break the glass. To my knowledge and understanding of
that report, it was not ever the intent to recommend tapping
into segregated customer funds.
Senator Roberts. Mr. Abelow?
Mr. Abelow. Senator, I have not reviewed the specific
document that you are referencing, but my recollection is that
the key driver of liquidity, source of liquidity under that
scenario, was the use of a revolving credit facility.
Senator Roberts. You might want to take a look at it.
By all accounts, on the Friday before bankruptcy, MF Global
thought it had found a buyer to save you. It seems well within
the realm of possibility that, as you put it, Mr. Abelow, a
classic run on the bank overwhelmed your cash flow, and an
executive could have communicated somehow an order to use your
customer segregated funds to cover the firms liquidity crunch,
thinking that, of course, by Monday morning everything would be
fine, the company would be bought out, an infusion of money
from the new owner could replace the missing customer funds.
Is this plausible? Governor?
Mr. Corzine. Senator, as in a number of the questions, I
think I am being asked to speculate--and I really do not--I do
not really think I should speculate. I had no reason to believe
until the evening of October 30th that there was a misuse of
customer funds.
Senator Roberts. Mr. Abelow?
Mr. Abelow. Senator, I was shocked to be informed on Sunday
that there was a----
Senator Roberts. But is this plausible?
Mr. Abelow. --potential shortfall in customer funds. I
cannot speculate beyond that, sir.
Senator Roberts. Well, if this is not what happened, then
what did happen? What is your speculation on that?
Mr. Corzine. Senator, I think speculating is--should be
done in the context of the facts that are being developed by
the investigators. As in my oral statement and also in my
written statement, I have put forward issues about whether
money was returned properly that should be looked at. I put
forward transactions that I think would be obvious that people
should check all the details on. But how I would come to
conclusion without records, without the ability to go through
it, is speculative and I think would be inappropriate and could
be misleading.
Senator Roberts. Madam Chairman, I am over time, but I
would like Mr. Abelow to respond. What did happen?
Chairwoman Stabenow. I would ask you to respond briefly in
this round.
Mr. Abelow. Senator, I do not know what happened, and I am
awaiting the results of the investigation to inform all of us.
Senator Roberts. Thank you, Madam Chairwoman. I have
additional questions. We will ask those on the second round.
Chairwoman Stabenow. We will absolutely have a second
round, yes.
Senator Conrad?
Senator Conrad. Thank you, Madam Chairman.
You know, as this has unfolded, I have had contacts from my
home State, several customers, several broker-dealers, one
missing half a million dollars, and absolutely through no fault
of their own. And as one tries to kind of pierce the veil here
and figure out what happened, it is incredibly difficult to do.
I had a chance to read the lengthy article in the New York
Times which has some interesting tidbits in it. One is that--I
have operated under the assumption that these European trades
on European debt were losing money. The assertion in this
article is that they made money. The second paragraph from the
end, ``Ultimately, the bets Corzine placed wound up better than
the firm itself. The European debt trades were profitable,
though too late for MF Global.''
Is that the case, Governor Corzine? Were they profitable
trades?
Mr. Corzine. Senator, at the time of the bankruptcy on
October 30th, they were still positive trades, positive
positions, but they clearly were a part of the ingredients that
led to the loss of confidence in the firm. So there are really
two different issues. I think Mr. Abelow talked about, as I
think I did in my written testimony, the ingredients that led
to that loss of confidence, and the foreign sovereign positions
are certainly part of that process.
Senator Conrad. Well, that really comports with this
article. Basically this article says there was a loss of
confidence. The Moody's downgrade was devastating because that
affected the firm's liquidity. You have indicated there were
margin calls, but that was not atypical that you would have
margin calls in a firm like this. But was the level of margin
call unusual at the end of that week? That is, were the demands
on the company for cash at the end of that week extraordinary?
Mr. Corzine. Senator, to the best of my recollection, there
were increasing demands for margin in different places. The
process slowed up in the clearing and movement of transactions,
but specifics, I would really want to rely on being able to
look at records to be able to answer with precision.
Senator Conrad. This article, by the way, suggests that the
day after the bankruptcy, you, Mr. Corzine, sifted through
transactions in the hope of locating the missing money. Is that
the case?
Mr. Corzine. Senator, to the best of my recall, I sat with
a group of internal folks who might be able to give me the kind
of information that I think you would like to get from me today
to see if we would be able to identify some sources of where
these missing funds might be.
Senator Conrad. Is it possible----
Mr. Corzine. I was stunned, and the first of my knowledge
of segregated funds being out of reconciliation was that
evening, on the 30th.
Senator Conrad. Because you believed that the funds were
where they were supposed to be. But they were not. So something
has happened here. I mean, I have heard speculation from people
who are deeply knowledgeable in this area that money was
transferred that came from client accounts by somebody's
authority with the idea that those funds would be made whole
the following week because the company was owed money that
would normally come to it in the normal course of business,
and, of course, when everything went south, funds did not
transfer money to MF Global that were really due MF Global.
Do you think it is possible at the end of the day that
there will be a finding that, in fact, MF Global is owed money
that will cover the shortfall here?
Mr. Corzine. Senator, I would respond the way I did to
Senator Roberts. I think it would be speculative on my account
to opine about that. As I said in my written and oral
statements, those are possibilities, but without having the
ability--probably not even by myself, but by experts--to go
through some of that, which is exactly what the trustee and
other investigators are doing, it would be virtually impossible
to speculate.
Senator Conrad. Well, at the end of the day, what we know
is customers are out funds that are due them. You have all
expressed your regret at that and your sympathy for those who
have been adversely affected and came across as sincere to me.
But somehow customer funds were transferred in a way that is
inappropriate. And in searching your memory now, is there any
conversation that you were part of that could have been
misinterpreted by someone to authorize the transfer of customer
funds to cover margin calls or for any other purpose that was
not appropriate?
Mr. Corzine. Senator, I specifically put in my opening
statement, because I want to be very clear on it, I never
authorized the misuse of customer funds, I did not intend to
authorize the misuse of customer funds, and I do not believe
that it would be possible to construe anything that I said as
an authorization.
Senator Conrad. So searching your memory, Mr. Abelow,
anything that--any conversation you were part of, any
conversation you know about, any conversation where it could be
misconstrued, what you said, that would have led somebody to
believe they should transfer customer funds?
Mr. Abelow. Senator, I do not recall participating in any
conversation about the use of segregated funds other than for
their intended purposes.
Senator Conrad. You know, in searching your memory, there
is--you know, you were in a chaotic crisis situation. You do
not remember a conversation where somebody comes and said,
``Hey, we could transfer funds from customer accounts and cover
these when we get the money back on Monday, anyway''?
Mr. Abelow. Senator, I do not recall any conversation about
customer funds being used for anything other than their
intended purposes.
Senator Conrad. All right.
Chairwoman Stabenow. Thank you very much.
Senator Lugar?
Senator Lugar. Thank you, Madam Chairman.
We have heard, at least according to my notes, that there
were as many as 38,000 customers of MF Global, and we discussed
with the previous panel, who were some of the customers of MF
Global, or through affiliates were, why they retained this
affiliation. I am simply curious, because we have heard at
least some testimony that in April or May there already were
hints, perhaps because of European bond transactions or other
investments of MF Global, of anxiety on the part of rating
agencies. But, in any event, before this crucial weekend in
October, an actual declaration, apparently, of a downgrade in
earnings of the firm.
Our concentration today obviously has been on the
customers. Many are our constituents who, for the time being,
had the segregated funds and do not have the money. I raised
with the previous panel sort of the business judgments which
led people to want to be affiliated and a customer with your
firm.
Was there no early warning that might have led some of them
to decide to do business with somebody else? It appears to me
that throughout this period of time there was a considerable
degree of anxiety in the financial markets about all of this.
You have testified, Governor Corzine, that the actual
European bond transactions at the time of the final bankruptcy
were doing better than some of the other things that you had
there, but that surely must not have been true throughout the
entirety of the year. That was your business to try to
determine how you were going to make money for MF Global. But I
am just curious. Was any of this transparent? Would any of the
38,000 customers have some idea about your portfolio, your
transactions, your movement toward a loss of earnings? Was this
entirely opaque as far as customers?
Mr. Corzine. Well, Senator, I really would not be able to
tell you what kind of credit work an individual customer would
do or any particular customer. But most of our introducing
brokers--I think you heard from one this morning, and there
were many--it was not unique with Advanced--who represented and
introduced clients to us, certainly they would have the
capacity to read a 10-K or a 10-Q, the public filings,
certainly they would have the ability to review credit rating
agency comments. And as you know, probably know, most public
companies, ourselves included, had quarterly presentations of
our earnings--not earinings in our case, I guess our results,
and those were open to general distribution and understanding
of what we best understood at the point in time existed. And
those are pieces of information that are in the public forum on
a regular basis that certainly sophisticated investors and
counterparties look to.
Senator Lugar. Well, many sophisticated investors must have
come to a conclusion that continuing on with MF Global was not
a very good idea for themselves or for their customers. But
perhaps they said even if MF Global goes into bankruptcy, still
our segregated accounts will be safe, that is simply the law of
the land and is almost bound to occur. In other words, I am
just trying to gauge how we reached the situation in which we
still had the 38,000 customers and we still had the farmers who
were hoping to hedge and so forth tied up here, because clearly
the distress today is the overall picture, but specifically
with people who felt that somehow the law simply would not
permit this loss, regardless of what happened to you and the
management of MF Global.
Now, you are saying essentially all these records were
there, regular quarterly reports and various other reports, so
that you were not hiding any transparency of the risks that
were involved in these kinds of investments, if I hear you
correctly. Is that your assumption?
Mr. Corzine. My assumption, Senator, is that we were
complying with the disclosure requirements, and those are
reviewed by outside auditors, and they were certainly reviewed,
I would presume, by the credit rating agencies.
Senator Lugar. So if I were a broker that was guiding
customers, farmers, and what have you, in MF Global, I must
have been a company that really thought there was going to be
some excitement in terms of the European bond market, and this
was going to be a money maker, presumably, or certainly not a
disaster. But I do not know anybody, reading through those
markets through the last few months, that would have that
degree of confidence, and the thought that you were so heavily
involved in it would have led me to a lot of lack of
confidence, the other way around. In other words, sort of in
the afterthought, I am not certain why you made these
investments or why MF Global was so managed but, likewise, how
the other people were managed who were dealing with you and why
they continued with you.
Now, this may be beyond your comprehension likewise,
although you probably valued having these customers and figured
they might stick with you because they did not know any better
or they were speculating along with you, and it turned out the
speculation was wrong. But at the end of the day, I suppose we
are at a point--does the Federal Government now have sufficient
controls, regulations, and so forth on MF Global and firms like
this or anybody else so that the regular farmer who is trying
to hedge and sell and so forth is not out of pocket and at
least has some security? Or maybe this is unobtainable. I am
hopeful our hearings really lead to a situation where we think
of what kind of legislation or what kind of administrative
fixes are required really to remedy the situation.
Thank you, Madam Chairman.
Chairwoman Stabenow. Thank you very much.
Just to let the members know, we will turn to Senator
Klobuchar now, and then Senator Chambliss, and then we will
break until 2:15. Senator Klobuchar?
Senator Klobuchar. Thank you very much, Chairman Stabenow.
Thank you all for being here.
Thank you to Mr. Tofteland I was not here for the end of
your testimony--for your work from Luverne, Minnesota.
Mr. Corzine, it is being widely speculated that in the days
before MF Global declared bankruptcy, your firm shifted funds
from segregated accounts to the broker-dealer side of the
business. In his testimony before the House last week and in
his written testimony for today's hearing, Mr. Terrence Duffy,
the executive chairman of CME Group, asserts that at about 2:00
a.m. on Monday, October 31st, MF Global informed the CFTC and
CME that customer money had, in fact, been transferred out of
segregation to the firm's broker-dealer account. Do these
details match your recollection of what was conveyed to the
CFTC and CME early that Monday morning?
Mr. Corzine. Senator, the general description that Mr.
Duffy talked about on the issues of October 31st are
consistent.
Senator Klobuchar. Okay. To your knowledge, did MF Global
shift any funds out of the segregated accounts to the broker-
dealer side of your business or to pay any outstanding
obligations?
Mr. Corzine. Senator, as I have said in written testimony
and here again this morning, until the evening-- late evening,
actually--of October 30th, I was not aware of this unreconciled
amount in the segregated accounts.
Senator Klobuchar. Okay. Mr. Corzine, none of the foreign
debt securities that MF Global used to engage in the repo-to-
maturity transactions have defaulted. By your own admission,
these positions played a major role in the loss of market
confidence that led to the failure of the firm. In exploring
the role these trades played in the collapse of MF Global, many
have raised concerns over the accounting rules that allowed you
to treat RTM positions in foreign sovereign debt as sales
rather than financings, effectively removing them from the
balance sheet.
You said in your testimony that these positions were
publicly disclosed but not on your balance sheet. Is that
right?
Mr. Corzine. That is correct, Senator.
Senator Klobuchar. And do you believe that we should re-
examine the accounting treatment of repo-to-maturity
transactions?
Mr. Corzine. Well, to the extent that people believe that
the disclosures that we made were not adequate, and they
believe that more disclosure is better, that certainly should
be considered. I think I am probably not the one to speak to
this. The issue of--I am certainly not an accounting expert.
The issues of off-balance-sheet questions are very challenging
for those who make rules in accounting, the accounting rules.
And this is one of those that I think should be reviewed as
should all----
Senator Klobuchar. It just seems that more transparency
here would have been a good thing, and we are always hearing
about, no, this will hurt if we do this, if we do that. And in
this case, you had something that was somewhere off in a
footnote where I do not think Mr. Tofteland of Luverne could
have found it. And so I am just trying to figure out how we
make this better going forward in addition to finding this
money.
Mr. Corzine. It was in the 10-Ks, the disclosure with
regard to this. It was discussed with analysts and, if my
memory serves me correctly, is in some of the credit write ups
from the rating agencies.
Senator Klobuchar. Okay. Mr. Abelow, the role and
responsibility of the COO can vary dramatically between
businesses, so could you discuss for us your role at MF Global
and who to your knowledge, to get to the specifics, had the
authority at MF Global to move funds from segregated accounts?
Mr. Abelow. Yes, Senator. My role as chief operating
officer and president were to oversee the daily execution of
the firm's strategy, to focus on various elements of the firm's
strategic plan, and I had oversight responsibilities for a
number of operating areas of the firm.
I am sorry. As to the second part of your question----
Senator Klobuchar. Who had the authority at the firm to
move funds from the segregated accounts? I think it is a theme
you are hearing here. We are trying to figure out where did the
money go.
Mr. Abelow. My apologies.
Senator Klobuchar. No one seems to know.
Mr. Abelow. And, again, Senator, I am not aware of any
conversations about the movement of segregated funds other than
for their intended purposes, and a number of people inside the
firm--in operations, in treasury, in compliance, and other
areas--were involved in the daily movement of funds on a
regular basis.
Senator Klobuchar. Well, in the days leading up to Sunday
when it was discovered that the funds were missing, were you
involved in discussions about actions being taken to ensure
that your FCM business did not become under-segregated?
Mr. Abelow. I do not recall specific conversations about
actions for it to not become under-segregated. I do not recall
a specific conversation about that.
Senator Klobuchar. Okay. Mr. Steenkamp, I am assuming when
you heard there was a shortfall in the funds, as CFO you
immediately went looking for answers. What did you find?
Mr. Steenkamp. Senator, the first time I found out about
the segregation was on the Sunday, and we found out pretty late
on the Sunday night. I was informed that there is an issue with
the segregation calculation, that the assets are less than the
liabilities. And as I mentioned in my statement, following that
we informed the regulators very shortly thereafter. My initial
reaction was absolute shock. As far as I am aware, we had never
had issues with segregation in the past, and it was something
that was completely unexpected.
Senator Klobuchar. And so then what did you do? You went to
try to find the money?
Mr. Steenkamp. Well, it was late Sunday evening, and so at
that point we were about to execute the deal for an acquisition
of part of the firm. My first response was once we had taken a
short while to see if we could try and reconcile it before our
deadline late Sunday night, once we knew that we would not find
an answer this evening, we notified the regulators.
Senator Klobuchar. Very good. And did you see the testimony
of Mr. Duffy with CME and what he was saying about the timing?
I can read it to you again if you would like, where he said at
about 2:00 a.m. on Monday, October 31st, MF Global informed the
CFTC and CME that customer money had, in fact, been transferred
out of segregation to the firm's broker-dealer account. And so
is that your recollection of the timing of this?
Mr. Steenkamp. Yes, from my recollection, it was very, very
early Monday morning when we were on the phone with the
regulators. That sounds consistent.
Senator Klobuchar. All right. Thank you very much.
Chairwoman Stabenow. Thank you.
Senator Chambliss?
Senator Chambliss. Thanks very much, Madam Chair.
I have listened to your answers very carefully, and I want
to make sure that I get a direct answer to this.
Governor Corzine, did you understand that MF Global was
using customer funds to carry out proprietary transactions on
behalf of MF Global?
Mr. Corzine. Senator, I was not aware of the misuse of
customer funds, and I have said that, certainly did not
authorize it, did not intend to have it happen, and until that
Sunday evening, was not aware of it.
Senator Chambliss. I understand that is what you said
earlier, but my question is--well, let me frame it a little
differently. Would the use of your customers' funds to engage
in proprietary trades on behalf of MF Global have been illegal,
as far as you are concerned?
Mr. Corzine. Well, first of all, it is actually more
complicated. It gets into this Rule 1.25 and the repurchase
agreements between entities. As long as the securities that
were a part of that repurchase agreement between the entities,
that would be appropriate. It would not be a misuse of customer
funds.
For instance, if you had treasury bills and you did a repo
to the FCM from the broker-dealer, that would be appropriate.
If you did it for euro sovereigns, that would not be.
Senator Chambliss. Okay. And that is a generally accepted
practice in the industry, is it not, to----
Mr. Corzine. The Rule 1.25, which I think I heard Senator
Harkin actually read from, is very specific about what can be
invested with segregated funds, and any of the repurchase
agreements that could occur between the entities have to be in
1.25-eligible securities. They cannot be in things that did not
already meet that criteria.
Senator Chambliss. Okay. But you knew customer funds were
being used for that type of activity.
Mr. Corzine. For Rule 1.25-eligible----
Senator Chambliss. Right, yes. You know customer funds were
being used for----
Mr. Corzine. That--yes.
Senator Chambliss. --what you thought was a correct use----
Mr. Corzine. Correct use.
Senator Chambliss. --of investing customer funds.
So were you aware that margin calls were being made on a
regular basis just prior to--or towards the middle or the end
of October on the sovereign debt investments?
Mr. Corzine. The sovereign debt investments are in the
broker-dealer and were not a part of the FCM. And the answer to
your question is yes.
Senator Chambliss. So where did you think the money came
from?
Mr. Corzine. We run liquidity positions, and as I think I
heard Mr. Abelow say, we also had access to draws against our
liquidity lines with the banks.
Senator Chambliss. Okay. Mr. Steenkamp, you as the CFO, I
assume, review the financial condition of the company on a
regular and daily basis?
Mr. Steenkamp. As CFO of the Global Holding Company, I
would review the consolidated financial statements and
financial condition. And I think as I mentioned in my
statement, we have various regulated subsidiaries around the
world that have various rules and regulations under the
specific jurisdictions that they operate in. And with regards
to the financial condition and operations of those entities, I
would receive exception reporting and escalation notification
as issues arose from the finance and other offices in those
entities.
Senator Chambliss. So were you aware within the, let us
say, 2 weeks leading up to October 31 that regular margin calls
were being made against one of the subsidiaries for the foreign
debt investments?
Mr. Steenkamp. Senator, I was aware on occasions that there
were margin calls made as variation margin, and at times
initial margin changes occurred related to those positions.
Senator Chambliss. Okay. And as the chief financial officer
of the company, where did you think the money was coming from
to meet those margin calls?
Mr. Steenkamp. Well, Senator, as a global firm, we had some
house money that we had raised over time that we could use for
liquidity, and in addition, we also drew down, as Mr. Abelow
and Mr. Corzine mentioned, on the revolving credit facility,
which was a liquidity facility available to us to meet
liquidity needs as they arose.
Senator Chambliss. And did you not check to see where the
significant dollar amount of margin calls was actually coming
from, what account?
Mr. Steenkamp. Senator, I would not have checked the exact
account that it would be coming from, but with regards to
clients, you know, whether it would be coming from the client
side, there were controls, for example, back-end controls being
individual segregation calculations, that had never indicated
any issues. So there was no indication for me that it would be
coming from client accounts.
Senator Chambliss. Okay. Governor Corzine, if I understand
it correctly, in order to reach into a customer's account and
to meet the margin calls on the sovereign debt investments, you
would have to actually go out of one company into another
company?
Mr. Corzine. Well, Senator, you would not meet margin calls
for our broker-dealer by reaching into the FCM customer funds.
Senator Chambliss. Well, then, my question is: How did that
happen? How did somebody reach into the segregated accounts and
transfer money out of those to do something with it that they
should not have done?
Mr. Corzine. Senator, I do not want to repeat, and I know
that it is frustrating but it would be speculative on my part
to say that. I did lay out some flows of transactions and kinds
of occurrences that need to be established by the facts of
looking through all of these records, and that is what I think
the trustee and the other investigators are now doing.
Senator Chambliss. So is that kind of the guts of where we
are with MF Global right now, is trying to figure out who
transferred the money and who authorized the transfer of that
money out of the segregated accounts?
Mr. Corzine. I think it is now in the fact discovery stage
of where the flows of money took place, and when those then are
established, then you can follow that back to, I presume, how
it was authorized.
Senator Chambliss. Madam Chair, I know I am over my time,
but since I am last, can I ask one more question that I think
will generate a quick answer.
Chairwoman Stabenow. Please proceed.
Senator Chambliss. So am I to understand--and I would like
all three of you to answer this--did any of you know that this
money was being transferred out of the segregated accounts?
Mr. Corzine. Senator, as I said in all of my testimony,
until that Sunday evening I was not aware that there was a
misuse of customer funds.
Senator Chambliss. Mr. Abelow?
Mr. Abelow. Senator, I as well was shocked to learn on
Sunday that we had the potential deficit in our segregated
funds.
Senator Chambliss. Mr. Steenkamp?
Mr. Steenkamp. Senator, I had no knowledge that customer
funds were transferred into the broker-dealer until that Sunday
evening when we were notified.
Senator Chambliss. Thank you.
Chairwoman Stabenow. Thank you very much. We will reconvene
at 1:15. I will indicate that we are going to do the third
panel. We know this is a long day, but this is a very, very
important subject, and we appreciate all of you remaining with
us.
With that, the Committee stands in recess until 2:15.
[Whereupon, at 1:00 p.m., the Committee recessed, to
reconvene at 2:15 p.m., this same day.]
AFTERNOON SESSION [2:24 p.m.]
Chairwoman Stabenow. The Committee will come to order. We
thank you very much for continuing with us here in this very,
very important time and hearing, and we will now turn to
Senator Bennet for his questioning.
Senator Bennet. Thank you, Madam Chair. Thank you for this
holding, and thank you to the witnesses for being here today.
At the risk of eliciting an answer we have had already,
which is not going to help anybody here, I wanted to try to ask
it this way: The testimony, Governor and gentlemen, has been
that the controls were set up to segregate the funds and that
you certified to such--I am sorry for putting words in your
mouth, but in the interest of time--that nobody ever--none of
the people on this panel ever authorized any misuse of that
money or that it should not be segregated. Yet between $600
million and $1.2 billion is somewhere missing.
Is the impression that we should take that if somebody had
checked 10 days before this happened that there would not have
been commingling and that something happened during the weekend
of all of that stress that may have resulted in this? Is that
an impression we are supposed to have here?
Mr. Corzine. Senator, I will take a first run at it. I
think each of us have different perspectives.
If that had been the case 10 days before, under the
policies and procedures it would have been raised certainly to,
I think, each of our offices, unless it was a minor--and $600
million is not minor, $100 million would not be minor--element
with regard to segregated funds. And that was not the case, and
we have to report every day, I think both to the CFTC and the
CME. So that would, I think, deal with the first part of your
question.
The second, I think you are going to hear speculation again
on the multiplicity of transactions in accounts, at least that
is what you will hear from me because I would not know what
those transactions were, would have expected at the end of the
day, if there was unreconciled segregated accounts, that it
would get raised up again.
Senator Bennet. Do either of you have anything you would
like to add?
Governor, just on that point, your testimony at the
beginning of the hearing, as I understood it, was that some of
the final trades that were made, the firm or your still have
not seen the settlement, that we do not know at what price or
how they were recorded? Or did I misunderstand what you were
saying?
Mr. Corzine. Senator, the prices were set. I do not recall
those prices. I do not have records of them. But the particular
transactions that I cited in my oral testimony--I think there
are actually some more cited in my written--were the $1.3
billion commercial paper, which was a transaction that was done
for immediate settlement, cash settlement on Thursday, and then
there were $4.5 billion worth of Federal Government agencies
that were transacted for cash or immediate settlement on
Friday. The prices of those are in the books and records, and
while I do not know the ultimate disposition of those, they
certainly are places one might want to check.
Senator Bennet. Right. So I guess the point is that we do
not ultimately--we do not yet know what the proceeds of some of
those transactions were. Is that----
Mr. Corzine. We had anticipations of what those proceeds
would be based on the prices the securities were transacted at.
Senator Bennet. Thank you. I wanted to shift gears a little
bit and ask a question that was raised in both the New York
Times and the Wall Street Journal, who reported that MF
Global's former chief risk officer, Michael Roseman, sought to
warn the company and its board about the firm's growing
exposure to European sovereign debt, and the suggestion in the
articles is that in January of this year, the firm let Mr.
Roseman know that he was being replaced as the chief risk
officer.
Could you discuss from your point of view how the firm's
audit committee process addressed concerns that its chief risk
officer raised? And looking back on this, how would you have
improved, if you feel it needed improvement, internal processes
when you received these types of warnings from somebody like
your chief risk officer?
Mr. Corzine. Senator, the context and open discussion that
Mr. Roseman had with the board--and I presume the audit
committee, although I do not have my calendars to confirm that;
we encouraged people to be able to speak their minds-- was in
the context of asking for increased limits roughly this time a
year ago, maybe in December. Again, without records, I cannot
be precise with regard to those recollections. And there were
full discussions with the board about the point of view that he
would have expressed, and that was in the context of not just
sovereigns but exposures that we had to those countries with
clients that were involved in the limit structure, as well as
investments that we might have in other parts of the global
operations.
Senator Bennet. A judgment is a judgment, but that is not
what I am trying to litigate here. I just wonder whether, for
the benefit of our oversight, there were other processes that
could have been put in place or--just with the benefit of
hindsight.
Mr. Corzine. Well, clearly with the benefit of hindsight,
there would not have been as much long-term reflection on the
firm that came to pass in October if there were no euro
sovereign positions. I am not trying to deny reality. On the
other hand, first of all, the situation was entirely different
from the perspective of the world certainly a year ago than it
was at the end of October. And we encouraged the kind of
discussion and debate at the board level, and it was my view
that I should advocate for what I thought, based on the best
analysis that I could make of what was the right direction for
the firm to take on these issues that were different than Mr.
Roseman's views.
Senator Bennet. Thank you. I am out of time, but I
appreciate your responding to the questions, and, Madam Chair,
thanks again for holding this hearing.
Chairwoman Stabenow. Thank you very much.
Senator Johanns?
Senator Johanns. Madam Chair, let me also say thanks for
holding the hearing. It has been very informative.
Mr. Steenkamp, let me start with you. You have been sitting
through the testimony not called upon very much. You have heard
the other two gentlemen testify. Is there anything in their
testimony that you consider not accurate, first of all?
Mr. Steenkamp. Senator, it is tough to recollect and
comment on every single comment made here, but I would say in
general it is accurate with my recollections of events as
described, albeit, as I mentioned, I only became CFO in April
of this year and so some of the events, you know, did precede
that.
Senator Johanns. Is there anything about their testimony
that you feel is not a full disclosure and you feel a need to
tell the Committee more fully what happened?
Mr. Steenkamp. Nothing I guess specific to the best of my
ability jumps out at the moment.
Senator Johanns. Mr. Steenkamp, I was reviewing your bio in
preparation for this hearing: post-graduate honors in finance,
bachelor's degree. Were you top of your class?
Mr. Steenkamp. I believe I was in the top three of my
class.
Senator Johanns. Suffice it to say you are a very bright
guy. You started your career in audit practice. You assisted
clients in the SEC registration process, listing on exchanges
in the United States. We would all stipulate that is enormously
complex work, work that most people could not perform. You were
vice president of external reporting and accounting policy. You
were senior vice president, chief accounting officer, global
controller--a remarkable resume. Wouldn't you agree with me?
Mr. Steenkamp. Well, I guess that is not for me to judge.
Senator Johanns. What was your compensation package when
you joined MF Global?
Mr. Steenkamp. Off the top of my head--and I do not have
that information with me--I believe my starting salary was
somewhere in the region of 200 or 250.
Senator Johanns. And I am assuming there were options or
bonuses that plussed that up. Would that be correct?
Mr. Steenkamp. No. When I joined the firm, it was not yet a
public company.
Senator Johanns. Okay. Last year, what was your
compensation?
Mr. Steenkamp. Again, off the top of my head, I believe my
salary as of April when I became CFO was set at $500,000, and
it is all public record.
Senator Johanns. Now, during the time that you were there,
did you keep a diary or take notes during these meetings or e-
mail?
Mr. Steenkamp. Generally in meetings I do not take copious
notes although I do at times have notes that are on
presentations or various materials if we are in a meeting and
we are going through something specific with an agenda. But I
would not say I have a standard way of doing it.
Senator Johanns. Have you turned those notes or documents
over to the Committee?
Mr. Steenkamp. I am not sure what from a legal perspective
has been turned over or not. I know that we have, you know,
followed--the firm has ownership of all my work materials.
Senator Johanns. Now, my understanding is that there would
be separate accounts or a separate account maintained for
consumer funds, segregated accounts. Is that correct?
Mr. Steenkamp. It obviously differs depending upon which
jurisdiction you are in, so, you know, each regulated entity,
as I mentioned earlier in my statement, had very unique rules
and regulations that governed how every facet of the business
is run.
With regards to MF Global Inc., there are segregated bank
accounts, I believe, that are held. As I mentioned earlier,
though, similar to all of the entities, this is managed by
those senior officers in those entities from an operational
perspective.
Senator Johanns. Right. So you have got those separate
accounts, all the poor people that were here that have been
beat up by MF Global, thought they had their money in
segregated accounts. How would that money--who had authority to
say take money out of this account and put it at risk for
whatever investment? Who in the organization by name would sign
off on that? Would you sign off on that?
Mr. Steenkamp. No, I would not sign off on client
transfers.
Senator Johanns. When did you first learn of that?
Mr. Steenkamp. The first time I learned of it was on the
Sunday, and as I mentioned, you know, as far as I am aware, we
had never had any issues with segregation--any segregation
issues of client balances. And so it came as an absolute shock
to us that there would actually be an issue. These are also--
this is also a process and controls that have been reviewed and
assessed over many years by our regulators and our auditors,
and at not point that I am aware of had there ever been any
issues with regards to it.
Senator Johanns. Now, having been the head of a very large
organization myself, when I would have learned of something
like that, I would have asked a question like: ``Who was the
fool who did that?'' Did you ask that kind of question?
Mr. Steenkamp. So, Senator, as you know, during those
couple of days and the weekend, we were working around the
clock on numerous different things. When we found out about it
and were notified that there is an issue with the segregated
monies, it was late on Sunday evening. At that point we--you
know, it is such a shock that there might be an issue with it.
The original thought was it has just got to be a reconciliation
issue. And so we had a group immediately try and just reconcile
the segregation calculation. The calculation is not actually,
you know, bank accounts in that it is an actual calculation
which is very complex in nature and involves a lot of people
which then determines whether assets exceed liabilities. We
immediately had a team, a SWAT team, spend time on the
calculation and try and see where the reconciliation was. That
went on for a couple hours. And then it was, you know, at that
point in time, not being able to resolve the segregation issue,
we had to let the buyers as part of the acquisition know and
inform the regulators immediately.
Senator Johanns. Madam Chair, I have run out of time, but I
will stick around for the second round.
Chairwoman Stabenow. Thank you very much.
Senator Nelson?
Senator Nelson. Thank you, Madam Chair, for holding this
hearing. I am going to read just a couple of lines from letters
that I have gotten from Nebraskans.
``I operate a grain business in Nebraska, and part of my
business is buying and selling grains from farmers that I hedge
in the futures markets, principally at CME. Recently, a major
FCM whom we use, MF Global, filed for bankruptcy.'' It goes on
to say, ``How am I going to get my money back?''
Another one: ``Dear Senator Nelson: I am an attorney in
Nebraska. I represent a number of people and entities who have
commodity trading accounts associated with MF Global.'' It goes
on to talk about the money not being available. ``When will it
come back?''
Another one who says, ``My farm hedging account has been
going through MF Global. When I heard that they were downgraded
to junk, I asked for my $75,000 from my excess margin accounts.
I received a check, deposited it, and then it was returned. In
the meantime, they declared bankruptcy. Now I have a worthless
check, and my account balance is short by $75,000.''
I am sure that you have all heard similar sad stories of
this kind. You are aware of what the consequences are for
people if they are short on their accounts that they thought
were secure, not expecting to have them have any-- those
accounts have any risk other than what market risk they were
taking, but they did not expect to have a disappearance risk.
So when your team took over, the company was largely a
brokerage firm, did not regulate trade in sovereign debt for
its own profit, and at least not in the manner that ultimately
you did.
I guess my first question is: Why did you feel the need to
enter into large trading positions that the company had
previously never taken? And do you think that trading the
firm's capital in this manner was appropriate and expected by
shareholders? We are not talking about account holders. We are
talking about shareholders in the first case.
Mr. Corzine. Senator, just for a matter of clarification,
we run a very--we ran a very global organization with one of
our largest centers of operations in London which was an active
participant in the euro sovereign markets before--maybe not
before Mr. Steenkamp, but before I joined, and my colleague. In
fact, I think in my written testimony I talked about there were
positions larger than actually we ended up having. Now, they
were not in the repo-to-maturity category, which we had
actually had longstanding positions in our U.S. subsidiary with
regard to U.S. treasuries, U.S. agencies, and U.S. corporate
securities.
The genesis of this transaction was our examining as a firm
ideas that we thought were applicable, appropriate, prudent,
and I became convinced and became the primary advocate of these
positions. I do not want to dislodge any responsibility on
that, but it was consistent with kinds of transactions we had
taken on at other periods of time.
I will repeat, though, these were in our broker-dealer
operations, not in our FCM.
Senator Nelson. Right. Now, Mr. Steenkamp, you have some
knowledge, as you have indicated, of what the internal controls
were. Were the internal controls adequate to deal with the
transactions that were undertaken previously and most
currently?
Mr. Steenkamp. Well, Senator, the controls are obviously
across various functions. As global----
Senator Nelson. Excuse me. For each function, do you think
the controls were adequate to deal with each different kind of
transaction?
Mr. Steenkamp. Senator, that is very broad in the sense
that you would always in any organization have controls that
there are deficiencies or items that come up from internal
audit's reviews and other auditors, et cetera, that you then
work on and you improve.
I think, you know, with regards to the controls specific to
the customer money--that is, within MF Global Inc., as I had
mentioned--those controls had never in the past indicated any
issue with regards to that, despite going through numerous
reviews from the external and internal----
Senator Nelson. Well, wouldn't you think--excuse me.
Wouldn't you think that controls like that would be adequate to
at least set off an alarm if somebody was now taking money out
of those accounts? Not out of the company's accounts but out of
those account holders' accounts?
Mr. Steenkamp. Well, sort of the control that we had relied
on as a back-end control was the segregation calculation.
Senator Nelson. Yes.
Mr. Steenkamp. Which normally was prepared on a Monday with
regards to the Friday and provided to the regulators. That was
a calculation which, you know, was escalated to me as we
discussed with the other Senator on Sunday evening.
Senator Nelson. Well, if the money is missing, it is not
automatic that there was a violation of any law or that
somebody is engaged in any criminal activity. On the other
hand, the money is missing, and when it is missing, one does
not know whether there is absconding with some money. But
wouldn't the controls be such that you would be able to know
whether it is just money missing or whether somebody has
accessed the money?
Mr. Steenkamp. Senator, it is difficult for me to answer
that because, unfortunately, at the moment I do not yet as we
sit here know what went wrong, so it is hard for me to be able
to--I do not know which control went wrong. I do not know, you
know, where, I guess, the apparent breakdown occurred to be
able to answer.
Senator Nelson. But it would have to be some of a breakdown
if the controls are set in place so that this should not
happen. Nothing is perfect, I understand, but if it breaks
down, it is either because somebody intended to break it down
or because it was inadequate. Is that accurate?
Mr. Steenkamp. Senator, not knowing what happened, it--I
apologize. It is hard for me to answer, you know, whether it
was a breakdown, whether it was a willful action. It is hard
for me to answer.
Senator Nelson. In your opinion, will the investigation be
able to determine ultimately which is the case?
Mr. Steenkamp. I truly, truly hope so.
Senator Nelson. Okay. Thank you, Madam Chairman.
Chairwoman Stabenow. Thank you.
Senator Hoeven?
Senator Hoeven. Thank you, Madam Chairman.
Mr. Corzine, how could the customer accounts be short if
there were not transfers to the company accounts for the use of
the company? How else could they be short?
Mr. Corzine. Well, again, I want to stay away from as much
speculation as I can, but we have customers also withdrawing
funds from the firm. There are all kinds of transactions
associated with that at this moment in time. There are
possibilities in this repurchase agreement, the proper use of
Rule 1.25 investments of repurchase agreements between the FCM
and the broker-dealer that could have broken down.
I think I indicated in my written testimony and again this
morning the commercial paper. The $1.3 billion commercial paper
that was sold on Thursday was Rule 1.25-eligible securities,
properly available for offsetting segregated account monies.
And when those are sold, then there is always the possibility
of other failures to deliver, funds not crossing appropriately.
Senator Hoeven. Aren't you required to have controls in
place that prevent the use of customer funds by the firm for
benefit of the firm and that properly account for these
transactions you just described? Aren't you required to have a
system and controls to cover those issues?
Mr. Corzine. Senator, the short answer is yes, but I want
to make clear that there are investments that can be made of
customer segregated funds in the Rule 1.25-eligible securities.
And when you transact in those, there is always a chance of
operational breakdown. And I could not speculate whether that
happened or did not happen unless I looked at the records.
Senator Hoeven. But you are responsible to have controls in
place to properly account for that, track that, and report
that. As the CEO aren't you required to certify that you have
those types of systems?
Mr. Corzine. Senator, in all cases--I think Senator
Stabenow brought forth our signatures on the verification with
regard to Sarbanes-Oxley on the end of quarter of March--our
fiscal fourth quarter in March 31, 2011, and those controls
have to be verified both by internal auditors and on an annual
report have to be certified by external auditors, so the answer
is yes.
Senator Hoeven. All right. And if those systems are in
place and they are not adequate to do what they are designed to
do, then when you are investing firm money in foreign bond
currency transactions or bonds denominated in foreign currency,
aren't you in essence speculating with customer dollars if
those controls are not accurate and you do not make sure that
those controls are accurate?
Mr. Corzine. Senator, I do not have access to the records,
so I cannot be absolutely certain, but none of us, I would
think, would argue that we were using FCM, futures commission
merchant, money for the purposes of investing in the foreign
sovereigns. It was not an eligible security for client
segregated funds. These positions had been in place many, many
months through periods of time when we had gone through the
process that you asked me to verify existed. And so I think
there is reason to draw the conclusion that the foreign
sovereigns that are talked about involved in the RTM situation
were not in any identifiable way mixed up with FCM customer
money.
Senator Hoeven. You had a responsibility to maintain those
systems so that customer dollars were not used in firm
investments where you took a leveraged and, in fact,
speculative position. You also had a responsibility to make
sure that customer dollars were not transferred to or for use
of the firm. But, clearly, one of those two happened, or the
customer accounts would not be short.
Mr. Corzine. I just want to say again what I said to
Senator Chambliss before the break, that--and I think we can
verify this from others. Rule 1.25-eligible investments of
customer money is appropriate with regard to those segregated
funds. And----
Senator Hoeven. If they directed funds----
Mr. Corzine. --euro sovereigns do not fit----
Senator Hoeven. --be used in that way and--if they directed
that the funds be used in that way, and if they did so, those
are not the dollars they are short. The dollars they are short
were either moved out of their account for benefit of the firm,
or you have got an accounting error, and you have a
responsibility to make sure you have an accounting system that
properly segregates those dollars.
Mr. Corzine. As I said in my oral statement, as I said in
my written statement, there could have been breakdowns in those
systems. We believed we had the people, the procedures, the
policies in place to protect client segregated funds.
Senator Hoeven. What is your responsibility to recover
those lost customer funds?
Mr. Corzine. My responsibility is to allow for the facts to
be developed that find where that money has gone, just as it
would be for any of us. I actually have no authority with
regard to MF Global or the trustee today, but I believe that
the trustee and the other investigations that are ongoing will
be able to discover where that money went.
Senator Hoeven. Is it your belief that we will recover the
balance of those customer funds?
Mr. Corzine. I am hopeful, Senator. I note the Friday
activities that were in the bankruptcy court that, according to
the representations I know about, get to 72-percent recovery
for clients. I think I read that there are additional hundreds
of millions of dollars held back and that there is identified
customer money in London. So I am hopeful. I am not involved in
that process. I think it was all of our expectations that we
were not out of balance until we were all informed that Sunday
evening that we were. And so I will repeat: I am hopeful that
there will be full recovery very quickly.
Senator Hoeven. And you would acknowledge you have a
responsibility to cover those funds?
Chairwoman Stabenow. We need to make this quick at this
point. We will have another round, and so if you would like to
quickly answer that.
Mr. Corzine. Senator, I can only be hopeful, since I am not
in--I now have no operating authority with regard to that. I am
trying to cooperate, as I sit here today, as I have with other
hearings.
Chairwoman Stabenow. Thank you very much.
Senator Grassley?
Senator Grassley. Thank you. I have a short statement, and
then I have a couple questions for Mr. Corzine.
Now, you have all been asked repeatedly today about where
the money went and whether you authorized the transfer of funds
out of the segregated customer accounts. I share my colleagues'
interest in finding answers to these questions.
I am baffled that the top three executives of the company
cannot answer basic questions about what happened to the
customers' money. Your supposed lack of knowledge as to what
happened inside the walls of MF Global is alarming. I want
answers and Iowa farmers want answers on where the customers'
money went.
I am not going to belabor the point by asking where the
money went. It is apparent that none of you are able or willing
to offer an explanation today. I guess we will just have to see
what we learn through the ongoing investigation and any
subsequent proceedings.
Now, Mr. Corzine, I have some questions regarding some of
the interactions with regulators at the time of MF Global. It
has been reported that you were not required to retake your
Series 7 or Series 24 exams before assuming your role at MF
Global. FINRA requires investment professionals to retake these
tests if they have been out of the industry for 2 years.
Despite the fact that you had been out of the financial
services industry for 11 years, FINRA gave you a waiver, and
you did not take these tests.
Did you seek a waiver from FINRA so that you would not have
to retake your Series 7 and Series 24 tests?
Mr. Corzine. To my recollection, Senator, my legal counsel
made that request.
Senator Grassley. So through your----
Mr. Corzine. General counsel.
Senator Grassley. So through your legal counsel you were
granted the waiver?
Mr. Corzine. Yes, Senator.
Senator Grassley. On this request to FINRA.
Mr. Corzine. That is my understanding.
Senator Grassley. Okay. Now, another question. Trying to
figure out how much involvement Chairman Gensler had in the
early stages of the MF Global problems, I have this question.
Prior to October 31st, did you have any discussion with Gensler
about the state of affairs at MF Global and whether MF Global
was in trouble? And if you did have conversations, when were
those conversations and what exactly did you discuss with
Chairman Gensler?
Mr. Corzine. Senator, Chairman Gensler may or may not have
been on some of the joint regulatory calls where I gave updates
to a broad set of regulators on the progress, or lack thereof,
with regard to the sale of the firm, a posting on what our
actions were in reducing the size of our balance sheet and
generating liquidity. To the best of my knowledge, he was only
on that 31st general call, but other than those postings to
regulators, I am not aware of any conversations with him.
Senator Grassley. Okay. So then at least, you are telling
me for sure that you did not have a one-on-one conversation
with Mr. Gensler at any time?
Mr. Corzine. To my recollection, I have not with regard to
the activities in the last 10 days. I have written in my
written statement everything that I can recollect about any
specific interactions--what was it? A July teleconference call,
courtesy calls when I first took over at MF Global, and then--
--
Senator Grassley. But not during this period of time----
Mr. Corzine. Not in that period of time.
Senator Grassley. --of the last few days before bankruptcy
that you had any one-on-one telephone conversation with
Gensler.
Mr. Corzine. Correct.
Senator Grassley. Okay. Now, a last question for you, and
then I have a question for Mr. Steenkamp. If none of you know
what happened to the customers' money, could each of you give
me or the Committee the name of some MF Global employee who can
come and tell this Committee what happened to the segregated
customer accounts? There has got to be somebody there that can
tell this story. Just give us a name. Joe Blow? Mary Smith?
Mr. Corzine. Senator, my view would--I would go to our
treasury department and or treasury ops, as we talked about
earlier, and the people who headed that were probably closest
to the scene of the action.
Senator Grassley. But that does not give us one name for
sure that could answer our questions. You are saying somebody
in that office, but you do not really know who it is.
Mr. Corzine. The outline of the structure, I think Mr.
Steenkamp presented, starts with certain people at the very top
of it. I happen to know that the individual was on vacation
that week, Christine Serwinski, and the CFO of the North
American operations, that team of people--and it is quite
large--would be one of those places that you might look.
Senator Grassley. Okay. Then I would have this question for
Mr. Steenkamp. Who specifically told you that Sunday that
customer money was missing?
Mr. Steenkamp. If I recall correctly, I was in a room with
a large group of people as we were working on the acquisition,
and one of our folks from finance had been notified that there
was an issue and had just pulled me aside in the room and
notified me.
Senator Grassley. Okay. What is his name or her name?
Mr. Steenkamp. It was our global product comptroller, Mike
Bolan.
Senator Grassley. Okay. Thank you, Madam Chairman.
Chairwoman Stabenow. Thank you.
Senator Thune?
Senator Thune. Thank you, Madam Chairwoman.
If I could just ask any of you to think of any way or
provide an example of how $1.2 billion of customer funds could
be transferred and disappear without any laws or regulations
being violated, I mean, just--in other words, give us a
hypothetical scenario of how that could happen without breaking
any laws or existing regulations? Does anybody want to take a
stab at that?
Mr. Corzine. Senator, I think anything that any of us would
do on that would potentially be misleading. It would certainly
be speculative. In my oral and written remarks, I laid out some
places where I thought there were possibilities of where the
clearance and settlement system could break down.
Senator Thune. Senator Corzine, there are reports I have
seen that indicate that you were in contact with Chairman
Gensler and the CFTC regarding a proposed rule restricting
brokers from trading with client money or customer funds in
sovereign debt. The rule, which is now being called the ``MF
Global rule,'' was apparently delayed because of your
opposition. The CFTC only approved it after MF Global had gone
bankrupt.
Why did you lobby against proposed changes to CFTC
regulations that would have restricted futures commission
merchants from investing customer funds in obligations of
foreign governments?
Mr. Corzine. Senator, to my recollection, I did not speak
with Chairman Gensler about the foreign securities aspect,
particularly on that conference call on July 20th. To the best
of my recollection, I was speaking about the internal
repurchase arrangements between a subsidiary and the FCM, as I
have stated to the Senator from North Dakota and others, and
whether that would continue to be available to FCMs at large or
global organizations at large, but not with respect--to my
recollection, foreign securities never came up in that
discussion, and the only time that foreign securities were
available to be invested in FCMs is if you took deposits from a
client in foreign currencies.
Senator Thune. You had said, Senator Corzine, during the
House hearing that you did not intend to break any regulations.
What did you mean by that?
Mr. Corzine. I tried to clarify that in my opening
statement here this morning. I never gave any instructions to
misuse customer funds. I never intended to give any
instructions or authority to use--misuse customer funds. And as
I have said at least once here, I find it very hard to
understand how anyone could misconstrue anything I said would
authorize the misuse of customer funds.
Senator Thune. From what you know now, can you assure this
Committee that no regulations protecting consumer funds were
violated in the days prior to the bankruptcy?
Mr. Corzine. Senator, with whatever the range of estimates
about the segregated funds not reconciling, I do not think I
can give that assurance.
Senator Thune. There is a New York Times story that
indicated that some customer money may have been improperly
transferred as early as October 21. Can you confirm that date?
Mr. Corzine. Senator, I would be completely out on a limb
speculating, no idea, and I would have to go back--I literally
would have to go back through thousands of pages.
Senator Thune. Okay. And if you cannot confirm the date, I
assume then that you would not be able to give us an idea about
when MF Global began transferring funds out of the customer
account.
Mr. Corzine. It would be speculative. I do not have the
facts. I do think that the CME has testified that they did an
85-or 90-percent check against the Wednesday--is that the 26th?
And I think you can--and they suggested at least in that
testimony with reasonable testing of bank accounts and flows
that we were in excess. But I really think that is a question
that the CME should answer.
Senator Thune. All three of you have testified that, to the
best of your recollection, none of you gave any instructions to
anyone at MF Global to transfer funds from segregated accounts,
yet it happened. Prior to October of this year, whether to
cover margin calls or for any other reason, have there been any
other incidents of improper or unauthorized funds transfers at
MF Global? Or is this the first time any of you are aware of
anything like this happening?
Mr. Corzine. Senator, from my standpoint, if there had ever
been anything like we found out on the evening of October 30th
or if there had been--it would not have had to rise to the
level, the dimension on that evening--I think any of us would
have been notified if we had not then--the Senator from North
Dakota would have been absolutely right. We clearly would not
have had policies, procedures, and people in place. I am not
aware of that, and we have had many audits by external
regulators and external auditors.
Senator Thune. Madam Chair, my time is up. Thank you.
Chairwoman Stabenow. Thank you.
Senator Boozman?
Senator Boozman. Thank you, Madam Chair.
Senator Corzine, can you help me understand? There has
been, it seems like, a lot of ambiguity about Rule 1.25. Can
you help me understand who would be--what the eligible
investments would be that could take place under that?
Mr. Corzine. Senator, I do not know whether you were here
when Senator Harkin gave an introduction to his question to the
first panel. I think he listed--and I do not want to be remiss
in leaving something off that list, but I have a general idea.
Senator Boozman. You had a trading strategy. Was there a
specific time--Mr. Abelow, I think you said you are responsible
for day to day. You know, we have had this-- evidently there
was perhaps a change, you know, using Rule 1.25, using that
ability. Was there a specific time when the firm changed their
line of investing? We know that, you know, there are a number
of different ways of doing it based on Rule 1.25, as the
Senator explained.
Mr. Abelow. Senator, I apologize. In my comments about
overseeing day-to-day implementation of the strategy, my
responsibilities did not include oversight of trading and
position taking.
Senator Boozman. Who was the person that was in charge of
that particular----
Mr. Abelow. I am not certain who----
Senator Boozman. Who would you guess?
Mr. Abelow. Senator, I think there are two separate
questions. The 1.25 securities I believe were in a portfolio
that was overseen by the treasury department, and then other
types of trading activity had different oversight.
Senator Boozman. In your firm, though, who was responsible
for determining, you know, what--they had the latitude of the
Rule 1.25. Who made the decisions as to what they were doing?
Mr. Corzine. Senator, the treasury operations, treasury
functions, along with our internal audits would work to assure
that the investments that were held using the customer funds
conformed to Rule 1.25, and as I think has been stated, at
least until that evening on the 30th, there had not been any
indication that had ever been not followed.
Senator Boozman. Right. But we have got a problem. At some
point something happened, and I guess--you know, treasury is
involved in that process. I guess my question is: Who directly
in the firm interfaces with treasury and makes those decisions?
Mr. Corzine. The decisions about whether you move money is
separate from what would be the investment decisions that you
might take. The investment decisions that you would take
against--I should not say ``against.'' The investment decisions
that you would take had to conform to Rule 1.25, and nobody
ever disputed that, nor am I aware of any time that those
investments did not conform to that rule.
Senator Boozman. But I am curious. Who--again, I understand
what you are saying, but knowing that you have got, you know,
this smorgasbord of kind of doing things in a certain way, who
made the decisions as far as, you know, your strategy in the
investments?
Mr. Corzine. The strategy at the highest level was reviewed
at the board, certainly reviewed by myself. But the actual
implementation was done by our treasury personnel.
Senator Boozman. So who is that?
Mr. Corzine. There are a whole series of people that were
involved in treasury, and at time different persons in the firm
would----
Senator Boozman. I guess--and I do not mean to interrupt. I
guess my frustration--I think Senator Grassley expressed it,
too. I mean, we have got this major problem, and you guys, you
know, were pretty high in the organization, and yet, you know,
when we try and dig and find out kind of what occurred and who
did what, nobody can really remember or does not really know.
And so it is a problem.
So I guess what we would like for you to do--what I would
like for you to do is help us, you know, understand who was
involved specifically, and I think that, you know, certainly
you should have been in a position to know that.
I yield back the rest of my time. Thank you.
Chairwoman Stabenow. Thank you very much.
I believe we have completed our first round of questioning,
so let me continue with our second round, and thank you all
again for being here.
Let me talk a little bit more about treasury operations
because, Mr. Abelow, it is my understanding--first of all, our
Committee staff has been having a number of conversations with
people at the operations level to learn more and gather
information and so on. And it is my understanding that the
treasury operations actually report to you, that you oversee
that department. Is that correct?
Mr. Abelow. It is correct that I oversee operations, and
the global head of operations reports directly to me, and
treasury operations reports up through several chains to him.
Chairwoman Stabenow. And so what is your responsibility in
overseeing the operations of treasury?
Mr. Abelow. Senator, my responsibilities I think with all
of the areas that I oversee, including treasury, are to, first
and foremost, ensure that we have appropriate professional
personnel in place to oversee those functions and to ensure
ongoing functioning of them.
Chairwoman Stabenow. And do you think they were functioning
appropriately?
Mr. Abelow. Other than the normal course of occasional
incidents that are reported through operational risk or through
audit findings, prior to the period in question, there was no
evidence of there being any problem. As I said earlier, the
first that we learned about there being an issue with
segregated funds was Sunday, October 30th.
Chairwoman Stabenow. And I would like to clarify a little
bit more. You have talked a lot, Mr. Abelow, about intended
purposes, and this really goes to Rule 1.25, and so I just want
to be clear. Do you consider the investments permitted under
that rule to be the intended purposes for customer segregated
funds? Because that is not what we heard on our first panel in
terms of what the farmers' understanding was. Of course, as
colleagues have asked about Rule 1.25, internal repo
transactions and rehypothecation and loaning and borrowing
customer collateral, could any of these transactions have led
to the shortfall of customer funds?
Mr. Abelow. Senator, my understanding, when I made
reference to ``intended purposes,'' you are correct, that is
that I never heard a conversation where anyone spoke about
using customer funds or assets for any purpose other than
investment in Rule 1.25-eligible securities.
Chairwoman Stabenow. Are there any other kinds or any other
uses of customer funds by MF Global that could have resulted in
them being lost? And I am not talking about misuse or
unintended purposes at this point, but was MF Global doing
anything with customer funds that could have led to a
shortfall?
Mr. Abelow. Senator, I am not aware of any, and so it would
be speculation on my part.
Chairwoman Stabenow. Okay. Let follow up and ask all of our
panelists a little bit more about rehypothecation, in effect,
using customer assets as collateral to support financing for MF
Global. This practice puts customers' assets at risk if MF
Global were to default on its loans. How common was it for MF
Global to be rehypothecate customer collateral? And, again,
could this be where the missing funds went? Mr. Corzine?
Mr. Corzine. Senator, I will start with I really do not
have any knowledge about the term ``rehypothecation'' in this
context, and so anything that I said here would be speculative.
It is not a term that we used at the firm. I am not aware of
that being something that took place.
Chairwoman Stabenow. Okay. Mr. Abelow?
Mr. Abelow. I am not aware either. I did not directly
engage in financing activity on the part of the firm.
Chairwoman Stabenow. Mr. Steenkamp?
Mr. Steenkamp. Financing activity was not something that
fell within finance, and, you know, in the context that I know
rehypothecation, it is in a standard repo/reverse repo type
financing context in the broker-dealer.
Chairwoman Stabenow. I know I have a lot more questions
about this particular practice that I want to make sure we get
into, but I wonder if any of you would respond to why we should
permit trades that potentially encourage excessive leverage and
create risk. And are these trades, in effect, a legal way to
violate a fundamental principle, which is to protect customer
money? Mr. Corzine?
Mr. Corzine. Senator, if the Rule 1.25 investments of
segregated funds was followed, then those securities, based on
the judgment of those who set that rule, should be available in
a period when customers want their money back, and that is the
intent of establishing that security positions can be taken far
more conservative than what would occur in the broker-dealer or
for house investments. And those investments should be just
exactly inside those kinds of constraints. And if that were the
case, then those monies should be available for clients,
protection of client funds.
Chairwoman Stabenow. Which is why we are here, because they
are not, right? I mean, the concern is that funds were not kept
segregated. At least at this point we are not going to be able
to identify 100 percent of the funds that were customer funds,
which is one of the reasons why we are here.
Finally, Mr. Steenkamp, you spent a lot of years in
accounting and financial reporting, obviously very
accomplished. I guess I would say--and I think this is a
fundamental question. How is it that large sums of money could
be moved from customer accounts without being elevated to
senior levels of management? As the chief financial officer,
how could this happen within MF Global?
Mr. Steenkamp. I mean, Senator, not knowing, and not being
able to investigate myself, I am asking the exact same
question.
Chairwoman Stabenow. But as a general practice. As a
general practice, did large sums of money move without senior
management being involved or being aware?
Mr. Steenkamp. As a general practice, something like that
should be elevated, escalated, any movement of client funds for
a broker-dealer activity should be elevated and escalated as
general practice. And as I mentioned, the first time we found
out about it was on the Sunday, Sunday evening.
Chairwoman Stabenow. Thank you.
Senator Roberts?
Senator Roberts. Thank you, Madam Chairwoman. I think I am
going to paraphrase from you and just simply say what we are
trying to get straight here is your firm that the three of you
were in charge of, amid the eighth largest bankruptcy in the
history of the United States, has somehow lost $1.2 billion of
your customers' money, and none of you know where it went. And
that is what is causing a lot of questions around here.
I want to go back to Mr. Abelow. Earlier today you
confirmed that the treasury operations--and apparently we need
the treasury operations person here. Her name is Christy Vavra,
by the way. She was the head of treasury ops. She could sit
down there in that empty chair, I am sure. She was under your
area of responsibility.
Then you went on to say--but if somebody gave an order to
move the money, would Christy know it? That would be my
question to you. But then you went on to say, well, she would
report to the person in charge of global operations. Now, who
is that?
Mr. Abelow. Senator, I do not know
Senator Roberts. You do not know.
Mr. Abelow. No, no. I apologize. I----
Senator Roberts. So you do not know who is in charge of
global operations, which comes under your area of
responsibility. I just told you the name, which I doubt you
knew, of the treasury ops person. Maybe you did not--or did. If
someone gave an order to move the money around, which Christy
Vavra know it?
Mr. Abelow. Senator, I apologize. What I was intended to
say was I did not know if she reported directly to the head of
operations or whether she reported to someone who reported to
the head of operations. I do know the name of the head of
operations.
Senator Roberts. How many heads of operations--how many
heads do we have to have around here before we finally drill
down and find somebody's name that knows what the heck is going
on?
Mr. Abelow. Senator, I understand your frustration and the
frustration of everyone in the room, and as I expressed in my
testimony at the beginning, I, too, would like to know exactly
what happened to the customer funds.
Senator Roberts. Why don't you together a PowerPoint or a
TO chart or something so we could put everybody's name and
finally we would probably get down to the custodian.
Earlier you said the Break the Glass plan that was
presented to the firm's leadership was dependent upon the use
of your revolving credit line. Now, the credit line was already
there. It does not sound like a contingency. What was the Break
the Glass plan if you exhausted the credit line?
Mr. Abelow. Senator, I have not looked at the so-called
Break the Glass scenario in more than 6 weeks, and so I do not
recall exactly what was in it. It was a scenario that was
designed to simulate----
Senator Roberts. So it is not a contingency. Now it is a
scenario, right?
Mr. Abelow. It was designed to simulate what might occur if
there were a loss of liquidity at the firm.
Senator Roberts. So was it a plan? Was it a contingency? It
was just--what?
Mr. Abelow. It was a--I believe that initially it was done
literally as that, to simulate what would happen and what would
the liquidity impact on the firm be under----
Senator Roberts. Well, it sounds like----
Mr. Abelow. --a certain stress scenario.
Senator Roberts. It sounds like somebody made a decision,
either top or somewhere in your heads of operation here, that
it became operational.
Mr. Abelow. The intention was that the next step in that
plan would have been to develop an operational plan. I do not
believe one was ever developed from that.
Senator Roberts. Okay. Let me return to a point made
earlier. You state in your testimony that the final days at MF
Global were a classic run on the bank, yet Governor Corzine
told us today that you all had enough cash to cover demand on
Friday, the 28th? Was there a run on the bank, or did you have
enough cash? It is either one or the other.
Mr. Abelow. Senator, I believe that at the end of every day
that week that we believed that, to the best of my
recollection, we were advised that we did have liquidity on
hand. But it was a run on the bank in the sense that liquidity
sources were evaporating.
Senator Roberts. Well, the classic question is: If you had
enough cash to cover the run, why did you fall into bankruptcy?
Mr. Abelow. Senator, I believe that after we had failed to
engage in a transaction to sell the firm, after we had
discovered that there was an apparent gap in our segregated
funds, we no longer thought we were in a position to continue
operating.
Senator Roberts. Okay. Governor, in your testimony, you
state that during the week of October 24 you reduced the MF
Global match book by $10 billion. You further state that you
took extraordinary steps to ensure that you were able to honor
customer requests to withdraw funds or collateral. Is this
correct?
Mr. Corzine. It is, sir.
Senator Roberts. Okay. Thank you. You said you drew down
your line of credit from JPMorgan. That was about $1.2 billion,
I think. On October 27, you stated, you sold $1.3 billion in
commercial paper, over $300 million in corporate securities.
Friday you sold $4.5 billion in U.S. treasuries. Is that about
correct?
Mr. Corzine. I think that is what my written statement----
Senator Roberts. In addition, you said that during the week
you unwound hundreds of millions worth of RTM and sold the
underlying debt instruments. How much was that? I think I
understand it is about $900 million.
Mr. Corzine. I think that is the number, sir.
Senator Roberts. So we have $1.2 billion from JPMorgan,
$1.3 billion in commercial paper, $0.3 billion in corporate
securities, $4.5 billion in treasuries, and $0.9 billion in
RTMs for a grand total of $8.2 billion. By my math, $10 billion
minus $8.2 billion is $1.8 billion. Where did this unaccounted
for $1.8 billion come from? And could it be ``loans'' from your
customer segregated accounts according to the Breaking the
Glass plan? I am speculating.
Mr. Corzine. Senator, I would have--my math may be poor,
but my addition to that would be $10 billion of reduction in
assets by reducing the match book. It would be reducing $4.5
billion on the asset side by the sale of the agencies, $1.3
billion on the commercial paper. As you know, the RTMs were
derecognized, so that would not have been a reduction of the
balance sheet and whatever the corporate securities were.
There would be liabilities that are reduced at the same
time, both on--on every one of those assets. And the purpose of
that whole process, except for the $1.3 billion in commercial
paper, was to produce less in margin calls from--or less margin
postings that would actually be returned to the firm in each of
those transactions. The commercial paper was Rule 1.25-
eligible, and that was sold for purposes of having cash, so
when the kind of people who were here on the first panel were
asking for their money, we would have the cash immediately for
that purpose.
Senator Roberts. Madam Chairwoman, I am out of time, and I
will await the third round. Thank you so much.
Chairman Stabenow. Thank you.
Senator Conrad?
Senator Conrad. Thank you, Mr. Chairman.
You know, what flummoxes us is how there can be $1 billion
or thereabouts missing and nobody seems to know where it has
gone. I think you would agree it is a curious thing. I think
somebody watching on television from home would say, ``Wait a
minute. These are the guys running the company and a billion
dollars goes missing. How is it that they do not have any
idea?''
You know, I have heard speculation--I referenced it in my
first round--that in those chaotic days when Moody's had
downgraded and all of a sudden the stock price plunges and you
then have to contemplate bankruptcy, and, therefore, firms
probably are not sending you money that owe you money, so you
are in a liquidity crunch even if those trades on European debt
were actually profitable trades, which everything I see now--
all the reading I have done suggests, boy, these guys made a
bunch of risky trades and lost money on them and, therefore,
there is the problem. Everything I read is those trades are
actually profitable trades, profitable positions, at least
until the roof starting coming in. But then you are downgraded,
so there is a liquidity crunch.
Do any of you know of an attempt in those final hours to
get London to send you back $170 million that was loaned to
them?
Mr. Corzine. Senator, I have no input on that.
Senator Conrad. You have not heard that there was a call
that went from MF Global, your headquarters in either Chicago
or New York, to London saying, hey, that $170 million we sent
you in a loan, we need that back?
Mr. Corzine. Senator, the only thing that I know about with
regard to this is that there were overdrafts in London, which I
talked about in my oral statement.
Senator Conrad. Overdrafts on their accounts by them?
Mr. Corzine. Overdrafts to JPMorgan in London accounts.
Senator Conrad. In London accounts. And to your knowledge,
was $170 million sent to London as a loan?
Mr. Corzine. Senator, I do not know the amounts,
transactions. Those are the kind of things that you would want
to see from records.
Senator Conrad. Would it surprise you that there was money
sent to them and then an attempt to get the money brought back
to headquarters?
Mr. Corzine. In the normal course of any day's
transactions--and now I am speculating--only that--and I am not
speculating about the close. But on any business day, lots of
transactions back and forth between London and New York.
Senator Conrad. Mr. Abelow, were you advised that there had
been a loan extended to London of $170 million and then a
subsequent attempt to get that money repaid?
Mr. Abelow. Senator, I do not recall any specific
conversation about a loan to London. What I do recall--and,
forgive me, my memory is--this was a hectic time. Monday
morning, October 31, and so this is post-discovering that there
is an apparent gap in client segregated funds, I recall a
series of conversations of asking people to identify all cash
and assets that may be outside of the control of the FCM and
returning them to the FCM. That was in response to this
surprise to us on Sunday night that there is now a problem. But
I do not recall a specific loan or any specific amount or
account being a part of that conversation.
Senator Conrad. Let me ask you, were the three of you
talking during this period? I assume you were.
Mr. Corzine. Of course, although we were all focused on
different activities of emphasis, as I have said in my remarks,
I focused on selling assets, bringing the balance sheet down,
had little less impact on selling of the firm, although I was
active in those dialogues with investment bankers and also
working our trading floors around the globe to make sure that
people were reducing positions, preparing myself for postings
with regulatory agencies, trying to gather information. I think
other people were working on other functions. That did not mean
we did not check in with each other, but it was not that we
were standing next to each on an hour-or minute-to-minute
basis.
Senator Conrad. Well, let me ask you this, if I can,
because, you know, we have an obligation to try to learn what
happened here. We have got constituents that have been
adversely affected. When you learned--or when you were told
that there was this--I think it was at the time a $950 million
shortage, what did you say to each other? Was there a theory? I
mean, I would think, if it were me and I heard there was this
shortage, the first thing that would come to my mind is, ``How
in the hell did this happen?''
Mr. Abelow and Mr. Corzine, did the two of you talk and
say, ``What in God's name happened here?'' And did you have a
theory?
Mr. Corzine. Senator, that is probably a polite way for a
response.
Senator Conrad. I am Scandinavian, so we try to be polite.
Mr. Corzine. The reaction is marshal all the resources--I
think you heard Mr. Steenkamp talk about it--and find out where
this money is and why we are out of reconciliation, and then
step back and let the people who know how to read those
records, those thousands of pages of records, get on with the
business. Concerned about our clients, concerned about the
available ability to deal with a rising sun and an opening of
markets.
Senator Conrad. Okay.
Chairwoman Stabenow. Thank you very much
Senator Chambliss?
Senator Chambliss. I will pass this round.
Chairwoman Stabenow. All right. Thank you.
Next, Senator--I think Senator Boozman has left. Senator
Johanns?
Senator Johanns. Mr. Abelow, you and Mr. Corzine have been
close through the years, haven't you?
Mr. Abelow. We have worked together for a number of years,
sir.
Senator Johanns. You were his chief of staff.
Mr. Abelow. I was his chief of staff when he was Governor
of New Jersey.
Senator Johanns. Mr. Steenkamp, I have been watching your
body language during this hearing, and you just seem like the
odd man out. You seem very uncomfortable about what is going
on, and mostly you have been quiet. How long did you stay at
this company after you knew that client money was missing?
Mr. Steenkamp. Senator, I am still at MF Global Holdings--
--
Senator Johanns. You are still there today----
Mr. Steenkamp. --as I mentioned in my statement, and I am
still trying to do any efforts that I can to help the trustee
of the holdings company to maximize value.
Senator Johanns. Okay. So you have access to the records.
Mr. Steenkamp. No. I have access to MF Global Holdings
information, the holding company, but I do not have access to
either the personnel or the records of MF Global Holdings,
Inc., for the most part because, as I mentioned, you know, on
October 31st when the SIPC trustee was appointed, there were
very clear boundaries put up.
Senator Johanns. What day did the clients' missing first
start missing?
Mr. Steenkamp. Well, on the Sunday when we found out, it
was reported to me that there is a segregation issue on both
the Thursday calculation as well as the Friday calculation. And
my understanding was that the Thursday calculation had
originally not shown a deficit, but that subsequently there was
a reconciliation issue which proved that to be wrong.
Senator Johanns. Now, $1.2 billion, I think by everybody's
definition, especially somebody else's money, is a massive
amount of money. As I understand it, never in the history--
never in the history--has client money ever gone missing.
Wouldn't there be some process or some person who had
sufficient integrity in this organization to say, ``Oh, my
Lord, clients' money is disappearing. I need to talk to the
boss''? And are you aware of anybody in the organization in
that Thursday, Friday, Saturday who said, ``Something very,
very serious is happening,'' or something like that and drew it
to somebody's attention? And who is that person, and whose
attention was it drawn to?
Mr. Steenkamp. Senator, I am not aware of anyone until I
was notified of it on the Sunday.
Senator Johanns. So it did not come to your desk before you
were notified on Sunday.
Mr. Steenkamp. Correct.
Senator Johanns. So in this entire organization, although
there must have been many, many people who knew that money was
being drained out of client accounts, being transferred, did
not step up and say to top management or at least to you,
``There is a problem here''?
Mr. Steenkamp. Senator, apologies for repeating myself, but
there had been no one--I mean, there had been no idea of this
until that Sunday. I mean, it was utter shock, I think as we
have said, when we found out about it for the first time, which
was Sunday.
Senator Johanns. Mr. Steenkamp, do you realize how
incredible your testimony, and the other two gentlemen, how
incredible that sounds to this Committee that $1.2 billion, the
first time in history this had ever happened, could get drained
away from customers and it does not come to your attention or
somebody does not seek your authorization or at least say,
``Geez, by the way, what is going on here?'' Doesn't that
strike you as incredible?
Mr. Steenkamp. Senator, I wish I could--you know, I mean,
we found out about it on Sunday, and there were no issues that
we were--that I was aware of with regards to client assets
being used in the broker-dealer up to that point, at any point
as far back as I can remember. And our procedures, as I
mentioned, were reviewed in detail by external and internal
parties.
Senator Johanns. How would you get money out of a client
account in this organization? Did somebody have to authorize
it? I mean, somebody in this organization had to have the
ability to say light screen, take the money?
Mr. Steenkamp. Senator, so, again, as global CFO, you know,
we--you know, my involvement was not in approval of client
balance movements or involvement in client balance movements.
Senator Johanns. Who would have that authority?
Mr. Steenkamp. We delegate those responsibilities to the
senior finance professionals, the experts that do this on a
day-to-day basis in finance, treasury, and treasury operations.
Senator Johanns. And who were they?
Mr. Steenkamp. Every entity would obviously be different
depending upon the rules and regulations that existed in the
entity and in the country and the jurisdiction it operated in.
Senator Johanns. I am just interested in the United States.
Who----
Mr. Steenkamp. In MF Global Inc., my understanding is that
there were numerous controls in place that covered treasury and
treasury operations.
Senator Johanns. You have said that. I want names. Who
would authorize, who would have the oversight, who would have
the ability to say take money out of client accounts?
Mr. Steenkamp. Senator, I do not think anyone would have
the authorization to take money out of client accounts to use
for firm purposes.
Senator Johanns. Well, who has oversight--you know, you are
dancing around with me. Who would have the oversight of those
accounts where that money has gone? And I want a name.
Mr. Steenkamp. Senator, I honestly am not trying to dance
around the issue. I am just not--I am not 100 percent sure who
the exact person--I think there are numerous people, as I
mentioned. I think some of the names have already been
mentioned around the treasury and the treasury operations
people. I am not sure who had----
Senator Johanns. I am out of time, and I want to be
respectful of the other Senators, but as part of your
testimony, I am requesting that those names be provided to the
Committee, because I would like those people sitting where you
are sitting so we can ask them: How did it come to be that $1.2
billion, the first time in history, was taken out of customer
accounts? Will you do that?
Mr. Steenkamp. I will try my best, Senator.
Senator Johanns. Thank you, Madam Chair.
Chairwoman Stabenow. Thank you very much, and let me just
say also to your last question, Senator Johanns, our Committee
staff are interviewing numerous people, are having
conversations at various levels of MF Global, and we are asking
for an accounting of the checks and balances and who was in
charge so that we, in fact, can answer those questions. So
thank you very much and----
Senator Roberts. Madam Chairman, would you yield just for a
comment?
Chairwoman Stabenow. Yes, Senator Roberts.
Senator Roberts. In regards to Mr. Steenkamp's observation,
I think I know where he is coming from, but I do not care what
business you are in; you do not delegate responsibility. You
may delegate authority, but you do not delegate responsibility.
And every time you say that you are responsible for X, Y, Z,
you are responsible for that. And that is why Senator Johanns I
think is so keen on this. I said give us a PowerPoint, give us
names, give us something. The only one we have come up with is
Christy Vavra. I do not know if Christy would say, ``Well, I
delegated responsibility, so I do not know.'' And we have to go
down one layer. After a while this gets to be ridiculous. It is
you three sitting here.
I am sorry to take more time.
Chairwoman Stabenow. Thank you. I very much appreciate the
comments, and it is important that we get as specific
information as we can. So we thank all of you for coming
forward and speaking with us, and we look forward to continuing
to ask these questions and get the answers as to where the
money is and who, in fact, was responsible for the
transactions. Thank you very much.
We will ask our next panel to come forward, and we thank
them for their patience.
[Pause.]
Chairman Stabenow. We will ask our third panel to come
forward. We appreciate your patience. It has been a long day,
but it is very important that we hear from all of you because
the third panel is--all of you are extremely important in all
this process, and so we want to make sure to lay out all the
parameters today even though we know that it is a long hearing
today. But we thank all of you for being here.
Let me introduce our three panelists, and then we will ask,
as you know, for an opening statement. Of course, we want
whatever written information you would like to give us, and
then we would ask for 5 minutes of verbal testimony, and then
we will have our questioning.
So our first panelist is the Honorable Jill Sommers. Jill
Sommers is a Commissioner for the Commodity Futures Trading
Commission. In 2005, she was the policy director and head of
governmental affairs for the International Swaps and
Derivatives Association. Prior to that, Ms. Sommers worked in
the Governmental Affairs Office of the Chicago Mercantile
Exchange where she was instrumental in overseeing regulatory
and legislative affairs for the exchange. Welcome.
Next we have Mr. James W. Giddens. Mr. Giddens is a trustee
for the Securities Investor Protection Act liquidation of MF
Global. He is also the co-chair of the Bankruptcy and Corporate
Reorganization Group at Hughes Hubbard & Reed LLP. Welcome to
you as well.
Finally, we have Mr. Terrence Duffy. Mr. Duffy is the
executive chairman for the CME Group based out of Chicago,
Illinois. He has been a member of the board since 1995, was
president of TDA Trading from 1981 until 2002, and has been a
member of CME since 1981.
So welcome to all of you, and before giving your testimony,
I would ask you to rise and to raise your right hand. Do you
swear that the testimony you are about to present is the truth,
the whole truth, and nothing but the truth, so help you God?
Ms. Sommers. I do.
Mr. Giddens. I do.
Mr. Duffy. I do.
Chairman Stabenow. Thank you.
Commissioner Sommers, we would ask you to start with your
testimony.
STATEMENT OF HON. JILL E. SOMMERS, COMMISSIONER, COMMODITY
FUTURES TRADING COMMISSION, WASHINGTON, DC
Ms. Sommers. Good afternoon, Chairwoman Stabenow, Ranking
Member Roberts, and members of the Committee. Thank you for
inviting me here today to discuss the MF Global bankruptcy. I
understand the severe hardship this bankruptcy has caused for
customers of MF Global. These customers correctly understood
the risks associated with trading futures and options, but
never anticipated that their segregated accounts were at risk
of suffering losses not associated with trading. Many customers
have reached out to me and my staff directly, and we are doing
everything we can to get as much of their money back to them as
quickly as possible. I have made this my number one priority.
The Commission has dozens of staff members in New York,
Chicago, and Washington working on these issues. I am unable to
discuss matters that might compromise the ongoing enforcement
investigation or parallel investigations by any other
Government agency, so I will focus my comments on the
bankruptcy cases pending in New York and on the legal
requirements surrounding the segregation of customer funds held
at futures commission merchants.
As I understand the Securities Investor Protection Act of
1970, the SEC has the authority to refer an entity registered
as a broker-dealer to the Securities Investor Protection
Corporation if there is reason to believe that the entity is in
or is approaching financial difficulty. SIPC may initiate a
liquidation proceeding to protect customers of an insolvent
broker-dealer when statutory criteria are met.
When a broker-dealer is also a registered FCM, as MF Global
was, there is one dually registered entity and the entire
entity gets placed into liquidation. Because there is one
entity it is not possible to initiate a SIPA liquidation of the
broker-dealer and a separate bankruptcy proceeding for the FCM.
It is important to note that when a dually registered BD/FCM is
placed into a SIPA liquidation, the relevant provisions and
protections of the Bankruptcy Code, the Commodity Exchange Act,
and the Commission's regulations apply to customer commodity
accounts just as they would if the entity were solely an FCM
and in a non-SIPA bankruptcy.
The Commission is no stranger to FCM bankruptcies. Lehman
Brothers and Refco are two of the most recent. While the Lehman
Brothers bankruptcy was monumental in scale and the Refco
bankruptcy involved serious fraud at the parent company,
commodity customers did not lose their money at either firm. In
both instances, commodity customer accounts were wholly intact;
that is, they contained all the open positions and supporting
collateral for those positions. That being the case, customer
accounts were promptly transferred to healthy FCMs, with the
commodity customers having no further involvement in the
bankruptcy proceeding. Unfortunately, that is not what happened
at MF Global because the customer accounts were not intact.
In FCM bankruptcies, commodity customers have an exclusive
right to customer property. This includes, without limitation,
segregated property, property that was illegally removed from
segregation and is still within the debtor's estate, and
property that was illegally removed from segregation and is no
longer within in the debtor's estate, but is clawed back into
the debtor's estate by the Trustee. Commission regulations also
allow other property of the debtor's estate to be classified as
customer property to make up any shortfall.
Within the first weeks of the MF Global bankruptcy, the
trustee, with the encouragement and assistance of the CFTC,
transferred nearly all positions of customers trading on U.S.
commodity futures markets and transferred approximately $2
billion of customer property.
On December 9th, the bankruptcy court granted a motion to
transfer an additional $2.1 billion back to customers. When
this additional transfer goes forward, commodity customers
should have received approximately 72 percent of their account
values as reflected by the books and records of MF Global.
These demonstrate that commodity customers are receiving the
highest priority in claims to the bankruptcy estate. We
understand that more must be done.
An FCM is authorized to invest funds that are in customer
segregated accounts. This authorization is found in Section 4d
of the CEA and in Commission Regulation 1.25. The Commission
finalized changes to Regulation 1.25 just last week. Those
changes just reinforced the long-held view of the Commission
that customer segregated funds must be invested in a manner
that minimizes their exposure to credit, liquidity, and market
risks to preserve their availability to customers and DCOs.
All Regulation 1.25 investments are subject to a general
prudential standard which requires that all permitted
investments be consistent with the objectives of preserving
principal and maintaining liquidity.
While our current focus is on returning as much money as
possible to customers, we are expending an enormous amount of
effort to locate the missing customer funds and pursuing the
enforcement investigation. All of the information we learn
during these aspects of our work will be relevant to the
Commission as we consider ``lessons learned'' and any policy
responses or regulatory changes.
Obviously, the Commission has a great deal of work to get
customer funds back where they need to be, to determine what
went wrong with segregated funds at MF Global, to determine
whether to prosecute any violations of the Act, and to
determine what needs to be done to prevent a similar
circumstance in the future. Commission staff is coordinating on
these issues with other regulators, both international and
domestic. We are also working closely with the trustee to
provide whatever support he needs to resolve issues with
commodity customer accounts. I greatly appreciate the continued
support of this Committee as we move forward with this
important work.
Thank you.
[The prepared statement of Ms. Sommers can be found on page
139 in the appendix.]
Chairman Stabenow. Thank you very much.
Mr. Giddens?
STATEMENT OF JAMES W. GIDDENS, TRUSTEE, SECURITIES INVESTOR
PROTECTION ACT LIQUIDATION OF MF GLOBAL INC., NEW YORK, NEW
YORK
Mr. Giddens. Chairwoman Stabenow, Ranking Member Roberts,
and members of the Committee, thank you for inviting me to
testify today about efforts to identify, preserve, and return
assets to the former customers of MF Global Inc. I am the
court-appointed trustee for the Securities Investor Protection
Act liquidation of the failed broker-dealer, MF Global Inc. I
appreciate the interest of this Committee and other Members of
Congress, including the direct encouragement of Chairwoman
Stabenow and Senator Roberts to expedite the returns to
customers as quickly as we can.
Along with my staff, I have been working closely and
continuously with the Securities Investor Protection
Corporation, Commissioner Jill Sommers, and the Commodity
Futures Trading Commission, the Securities and Exchange
Commission, and the Chicago Mercantile Exchange. By statute,
the trustee is the customers' advocate. My staff includes legal
experts, consultants, and forensic accountants. We take very
seriously our obligation to protect customers of the failed
brokerage. Our primary mission is to look our for the customer
and credit interest. We are focused on returning assets to
customers as quickly as possible in a manner that is fair and
consistent with the applicable provisions of the Securities
Investor Protection Act, the Bankruptcy Code, and the CFTC
regulations.
Every distribution we make must be approved by the
bankruptcy court on notice to all customers and parties in
interest. We are distributing as much as we can as soon as we
can within the law. And while we work around the clock on
identifying, preserving and distributing customer assets, my
office has made every effort to keep customers informed. We
have a website which had, I think, more than 10,000 inquiries.
Information on the status of the proceeding is posted to the
website daily. In addition, my staff is answering calls and e-
mails and holding meetings with customer groups and their
counsel. A call center and a website, as we indicated, are in
operation. We also will be mailing to all 36,000 remaining
customers statements of their last positions and reflecting as
best we can the first two transfers to assist them in
understanding where we are in the process and in completing
claim forms.
I am very pleased to report the distributions to nearly all
36,000 former retail customers, 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 was entered by the bankruptcy court yesterday.
The team worked over the weekend to put in place the mechanisms
with the cooperation of the CFTC and the CME, and the first
distributions are expected to begin to be made tomorrow and to
be completed within 2 to 4 weeks. All of this requires
transfers to new accepting FCMs and is a complicated process.
This will mean that retail commodities customers with U.S.
positions will receive approximately 72 percent of their
property.
The customer claims process is also up and running. Claim
forms have been sent by mail, and forms are available on our
website. Claims are being filed, reviewed, and as we meet here
today, some claims have already been approved and allowed.
As part of my statutorily mandated duty, I am also
investigating the extent of and reasons for the apparent
shortfall in customer funds. The investigation is ongoing. It
is led by the Department of Justice, also with the CFTC, the
SEC, and we are cooperating fully in their investigation.
It is too early to make or draw definitive conclusions on
many of the matters. At this time we do not know with certainty
the extent of the potential segregation and compliance
shortfalls, but I estimate the figure is not less than $1.2
billion.
For U.S. futures, foreign futures, and for securities
customers, there are three categories of segregated assets at
MF Global Inc. for the customers. First, for those with U.S.
futures positions, which is primarily under the jurisdiction of
the CME, but there are also U.S. clients with substantial
foreign futures positions. There are also securities customers
who had segregated funds. The full amount of the shortfall will
not be known with certainty until the claims process is
completed.
I feel obligated to share these preliminary numbers and
highlight the uncertainty that surrounds them. It is my hope
that the shortfall number will come down.
We have collected the available assets from depositories
that appear to be on the books of the debtor. This is not
simply a mathematical calculation, but is the actual control of
dollars. We also have estimated the potential claims, and that
is how we calculate the shortfall figure.
No matter the final amount of the shortfall, it is an
appalling situation. Its probable size is going to be
significant, and this will substantially affect our ability to
make a 100-percent distribution to former MF Global customers
in the immediate term.
Exhaustive efforts to collect funds from U.S. depositories
continue. Assets located in foreign depositories for customers
who traded in foreign futures are a more complicated matter.
They are now under the control of foreign bankruptcy trustees
or administrators. We will pursue these assets vigorously, but
recovery may be more uncertain and may take more time.
Thank you, Chairwoman Stabenow, Ranking Member Roberts, and
other members of the Committee, for the opportunity to testify
here today. You can be assured that amidst the unprecedented
circumstances surrounding the failure of MF Global Inc., we are
moving with speed and diligence to return customer property as
quickly as possible in a fair and equitable manner that
complies with the law.
Thank you.
[The prepared statement of Mr. Giddens can be found on page
128 in the appendix.]
Chairman Stabenow. Thank you very much.
Mr. Duffy, welcome.
STATEMENT OF TERRENCE A. DUFFY, EXECUTIVE CHAIRMAN, CME GROUP
INC., CHICAGO, ILLINOIS
Mr. Duffy. Thank you, Chairwoman Stabenow, Ranking Member
Roberts, and members of the Committee. I am Terry Duffy,
executive chairman of CME Group.
Let me start by saying the actions of Mr. Corzine's firm,
MF Global, 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 in minimizing market disruptions. My
testimony summarizes efforts 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 this
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. MF
Global's 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 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 more than a $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 this discrepancy was caused by ``an
accounting error.'' Our auditors, working with the CFTC,
devoted the rest of the day and night Sunday to find the so-
called accounting error. No such error was ever found. Instead,
at about 2:00 a.m. Monday morning, October 31st, MF Global
informed both the CFTC and CME at approximately the same time
that the shortfall was real and that customer segregated funds
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
discrepancy. 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 it made from the
customer segregated accounts. CME Group has provided this
information and the names of these 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 revised its segregation report for Thursday,
October 27th, indicating that the alleged $200 million in
excess segregated funds should have been reported as a
deficiency of $200 million. This shortfall in segregation on
Thursday, October 27th, was hidden by the inaccurate report, a
telling sign to keep regulators 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 management. Transfers of
customer funds effectuated by MF Global management for the
benefit of MF Global constitute very serious violations 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 toward speeding customer 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.
The federally mandated customer segregation program has
been in place since 1936. In the 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 the Congress, regulators, and industry
leaders to strengthen customer safeguards at the firm level.
I thank you very much for your time and attention, and I
look forward to your questions.
[The prepared statement of Mr. Duffy can be found on page
123 in the appendix.]
Chairwoman Stabenow. Thank you very much.
Let me start, Mr. Duffy, with your comments that you just
indicated. You raised a serious allegation in your oral
statement today regarding what Mr. Corzine may have known about
customer accounts. You did not mention that in your written
testimony, and you did not mention it in your testimony last
week before the House Agriculture Committee.
This leaves us wondering why you are sharing it now, what
you think it means, and I trust that CME has, in fact, shared
this information in a timely way with appropriate Federal
officials. And I would urge again everyone to cooperate fully
with the investigations that are going on because, of course,
anyone who is engaged in wrongdoing must be held accountable.
But would you want to respond further to that?
Mr. Duffy. I would be happy to. Madam Chairwoman, I did not
become--this information was not made available to me prior to
my testimony last Thursday in the House. I received this
information this past Saturday from an e-mail and a phone call
from our lawyers, and they informed me of what they had found
out in their investigations but did not share with me prior to
the Thursday testimony.
Chairwoman Stabenow. And do you have the names of the
specific people involved in terms of--you were speaking of
hearing--people referring to things that they heard, but do you
have the specific names that you have given to the authorities?
Mr. Duffy. The names of?
Chairwoman Stabenow. Of those who were on the call and were
involved in the conversation.
Mr. Duffy. One of our folks from CME who is the one that
reported this back to us was on a call, and you have to forgive
me, I do not know this woman's name. If you do not mind, I will
check with Legal.
Chairwoman Stabenow. I just want to make sure that you are
reporting specific names of people in the discussions.
Mr. Duffy. Yes. There is a specific name, yes, ma'am.
Chairwoman Stabenow. Okay. Mr. Duffy, in March of this year
you testified before the Committee, pushing back on CFTC's
effort to require more of exchanges and clearinghouses like CME
when it comes to compliance and oversight. In fact, in March
you said, ``There is no evidence that this will be beneficial
to the public or the functioning of the markets.''
I wonder if you still believe that is true.
Mr. Duffy. I do not know what you are referring to, what
issue it was, ma'am. There were many issues----
Chairwoman Stabenow. Well, we were moving forward-- CFTC
was moving--you pushed back on the CFTC moving away from
principles-based regulation, and I wonder if you still hold
that view today.
Mr. Duffy. Principles-based regulation has worked
flawlessly, ma'am, and we do believe, even in this instance,
that segregation funds still worked. What happened here was
somebody went in, violated the rules of the CME and violated
the rules of the Government, and transferred out customer
monies into the broker-dealer account. That has nothing to do
with the principles-based regulation, I believe, of the firm or
the segregation of the firm. Someone violated the rules, in my
opinion.
Chairwoman Stabenow. And so do you believe that CME has any
responsibility as the front-line regulator----
Mr. Duffy. If I did not think--what CME has done--and I was
very much in favor of doing this--was to put up the guarantee
of $550 million so that the trustee could then issue money much
more quickly back to the ranchers and farmers. And if you would
like, I would be happy to give you the notes of why I did that.
I asked that specifically for the farmers and ranchers, not for
Wall Street, not for hedge funds, or any other of our clients.
I said the most important constituency here needs to be made--
to get the money back quickly to them, are the farmers and
ranchers. That is why the board of the CME Group put forth the
$550 million to guarantee Mr. Giddens so he can allocate his
revenues.
Chairwoman Stabenow. As we go forward and looking to the
future, this kind of thing--we all want to make sure that this
kind of thing does not happen again in the future. Do you think
the right kinds of questions are being asked of the futures
commission merchants? Are we getting enough information to keep
markets safe in order to be able to trade? And are you planning
on reviewing your oversight systems in light of the MF Global
bankruptcy?
Mr. Duffy. Obviously, anytime something of this magnitude
happens, which has never happened before--and I think Senator
Roberts has pointed that out many times throughout the day--you
want to look at different things. We are obviously open, as I
said in my oral statement, to working with Congress and
industry participants to see if there are any changes that need
to be made for this not to happen. But I do think it is
important that--you know, there is $158 billion of customer
segregated funds in the United States of America. This
potential violation has never happened since this has been put
into place since 1936. So I do not think that the system is
broke. I think someone violated the rules, ma'am.
Chairwoman Stabenow. Thank you. And now for a moment let me
talk about customer money, which brings us all here and is our
concern. I want to thank you, Mr. Giddens, for your efforts and
your team's efforts and encourage you to continue to move as
quickly as possible to make people whole.
I am concerned that we are hearing that there may be a
shortfall in customer money. Even with this latest
distribution, we know that people will not be yet getting 100
percent of their funds. And with that in mind, I think it is
important to talk about what happens next. And so I would like
each of you to answer a couple of questions.
Do you agree that any value left in MF Global should first
go to customers until they are made whole? And to put it
another way, creditors and investors should not get a single
penny until MF Global's customers have been paid in full. And I
am wondering if each of you would agree with that. Commissioner
Sommers?
Ms. Sommers. Thank you, Chairman Stabenow. I think that it
becomes a little complicated when you are talking about the
bankruptcy of MF Global Holdings, the parent company. If we
have evidence to show that there is customer money at the
holding company level, then absolutely we will do everything we
can to make sure that money comes back to customers and to the
estate. We will be working closely with the trustee to make
sure that happens.
Chairwoman Stabenow. Okay. Mr. Giddens, would you respond
to that?
Mr. Giddens. Yes, I agree that both the Commodities
Exchange Act and the Securities Investor Protection Act give a
priority to customers, securities customers and commodities
customers, respectively, and if there is a shortfall, there are
provisions in both statutes which say that other assets ought
to be reached to cover those shortfalls. That may be deemed by
some to be something of a conflict, and the positions of the
CFTC and the SEC may disagree. But both statutes, if there are
shortfalls in customer property in either category, commodities
or securities, give a preference and have a mechanism for a
trustee to seek to recover for an estate assets which should
have been in segregated funds.
Chairwoman Stabenow. Mr. Duffy?
Mr. Duffy. I am not a trustee nor a regulator, but I
believe that there is SIPC insurance on the broker-dealer side.
There is what we call ``segregated funds'' on the FCM side. I
do believe that the FCM clients should be first in line in
front of all other participants, including bond holders and
everybody else.
Chairwoman Stabenow. Thank you. Thank you very much.
Senator Roberts?
Senator Roberts. Well, thank you Madam Chairwoman.
Mr. Duffy, we have spent a lot of time here today. We
probably should have had you on first. You have sort of tossed
a bomb here right in the middle of who we are trying to find
out who is responsible, who has the responsibility, who has the
authority. So senior MF Global employees told one of your
auditors--you were about ready to give us the name of that
auditor. Why don't you just supply that to the Committee, if
you might? I think you were going to turn to one of your
attorneys, and we will leave it at that, unless that
jeopardizes any ongoing investigation. We will let you decide
that with law enforcement.
October 31st, Governor Corzine was well aware of loans that
MF Global had made to other MF Global affiliates. Is that
correct?
Mr. Duffy. Sir, I am reporting back to you everything that
I know that was told to me. I was not there, sir, but in our
interviews with our employees, our employee told us that they
were on a phone conversation with this particular person at MF
Global that Mr. Corzine was aware of the loans that were being
made.
Senator Roberts. Did that employee indicate with MF Global
affiliates the MF Global customer segregated account funds were
transferred to?
Mr. Duffy. Not to my knowledge; I do not know that. I
believe what they were trying--if I recall the e-mail, it was
something of a $175 million loan that was made to a European
affiliate of MF Global, if I am understanding it correctly, if
I remember correctly.
Senator Roberts. Did they indicate when those loans were
made?
Mr. Duffy. I do not recall when they were made. I believe
it was in the last couple days prior to bankruptcy.
Senator Roberts. Did this individual indicate when Governor
Corzine became aware of those loans, or did he order them to
occur?
Mr. Duffy. All I was told was that Mr. Corzine was aware of
the loans that were made.
Senator Roberts. Did you provide this information to the
appropriate authorities? The answer, of course, to that is yes.
Mr. Duffy. Yes, sir.
Senator Roberts. Is there anything else about this
conversation you believe important for this Committee to know?
Mr. Duffy. No, sir. I was just asked to raise my right hand
and tell the whole truth, so I am telling you what I know.
Senator Roberts. I appreciate that.
Commissioner Sommers, it is my understanding that CFTC can
create advisory boards composed of industry officials. Is that
correct?
Ms. Sommers. Yes, Senator.
Senator Roberts. Has the CFTC considered setting up an
advisory committee like this to focus on what happened with MF
Global and to help make recommendations to ensure it does not
happen again?
Ms. Sommers. We have had a number of different
conversations of what an appropriate forum would be moving
forward so that we can hear from industry participants and get
their feedback on lessons learned.
Senator Roberts. Has anybody stopped you or recommended
otherwise?
Ms. Sommers. No. I do not think we have had discussions
that have taken it to the Chairman's level. It has just been
internally with my office and industry participants.
Senator Roberts. Well, he is not participating. Is that not
correct?
Ms. Sommers. That is correct.
Senator Roberts. Well, I would strongly encourage you to
set that up, and I encourage you to make that recommendation to
the Commission and to pursue it. And since Chairman Gensler is
not participating and has stated before the Committee last week
he does not know exactly what happened with MF Global, those
recommendations should be given to you as the lead investigator
and that you and the other Commissioners should make a
determination on whether or not those recommendations should be
pursued.
Let me say that--let me get organized here. Mr. Duffy,
again, beginning on Monday, October 24, the day of the Moody's
downgrade, you have said that CME began heightened scrutiny of
MF Global. What does this entail, very briefly?
Mr. Duffy. Well, we were in there----
Senator Roberts. Mic.
Mr. Duffy. Sorry, sir. We were in there to make certain
that the segregated reports were accurate. As I said in my oral
testimony, we were--they were on daily segregated reporting I
believe since they were--since Refco, since Refco went away and
MF Global took them over. So we were in there just making
certain that the monies were tying out, as I said, and we had
got about 85 or 90 percent done through Friday through the week
on tying out the customer segregated funds.
Senator Roberts. Commissioner Sommers, did the CFTC
participate or assist in this more intensive review?
Ms. Sommers. The CFTC staff went into MF Global mid-week--I
think the 26th was a Wednesday--under the same sort of review
to make sure that the daily segregated reports were accurate.
Senator Roberts. Under the heading of what you were looking
for, wasn't the primary purpose of your intensive review to
make sure that the segregated customer accounts were not
dissipated or otherwise misused?
Ms. Sommers. That is correct. We----
Senator Roberts. Mr. Duffy?
Mr. Duffy. Yes, sir.
Ms. Sommers. We received daily segregated reports from MF
Global, but in the normal course of business do not tie those
back to bank records. So that is what we were in the process of
doing.
Senator Roberts. Did you suspect that the customer funds
might go missing?
Ms. Sommers. No, sir.
Senator Roberts. I understand that you were not in charge
of MF Global's investigation at this time, but you have since
learned whether or not the CFTC participated in this review or
otherwise confirmed the CME's conclusion that all the customer
money was safe at the close of business on Wednesday, October
26th. Is that correct?
Ms. Sommers. That is correct.
Senator Roberts. It is my understanding Chairman Gensler
would have been the lead at that time on all MF Global-related
issues because he did not become non-participating until 8 days
later. Is this correct, as to your understanding?
Ms. Sommers. That is correct. I took over on November 9th.
Senator Roberts. I see. I think I am down to 37 seconds,
and we have the Senator to my right who is waiting patiently.
So I may ask a couple more questions, Madam Chairwoman, but I
think I will yield back at this time.
Chairwoman Stabenow. Thank you very much.
Let me talk for a little bit more about customer funds and
ask each of you another issue that I think, as we look at going
forward, we are going to be asking a lot of questions about
additional authority from Congress in terms of putting customer
funds first in processes.
It is possible during the days, perhaps even the weeks and
months, that led up to the firm's collapse that there were
third parties who saw it coming, and perhaps they were well
within their legal rights to do so. But if third parties held
back money or assets to keep them out of a lengthy and
uncertain bankruptcy proceeding, should the court be able to
reclaim that money for MF Global customers? Commissioner
Sommers?
Ms. Sommers. I guess my understanding of the way that would
work is if that money belonged to customers or belonged in the
4d account, then absolutely that would be able to come back to
the debtor's estate. I am not aware of money with third parties
or aware of whether or not that was money that belonged in the
4d account.
Chairwoman Stabenow. Mr. Giddens?
Mr. Giddens. We are looking at all the transfers for
several months out of the firm, and if there is a legal basis
for recovering that, we will make a demand, and we will also
engage in litigation if we have a sound basis for that.
We are in the process of collecting from counterparties of
MF Global Inc. who principally closed out all open transactions
after the bankruptcy for an accounting of whether they lost
money or made money; and if they owe money to the estate, we
will pursue that.
There is nothing to indicate, unfortunately, the amounts,
based on our analysis of the books and record, are going to be
astronomical or anywhere nearly sufficient to make up the
shortfall. But part of my duty as a trustee is to pursue causes
of action to recover assets for customers, and we intend to do
that.
Chairwoman Stabenow. Thank you.
Mr. Duffy?
Mr. Duffy. I would have nothing more to add than what
Commissioner Sommers already said.
Chairwoman Stabenow. Okay. Thank you.
Mr. Duffy, some have suggested that CME should make whole
the customers of MF Global right now and take over the claims.
Would you consider that kind of an idea?
Mr. Duffy. As I said, we have put up money to encourage the
trustee to pay back. I also said there was $158 billion of
customer segregated funds in the United States. Nobody can
guarantee $158 billion. You know, that is why there are rules
on the books, and that is why we have disclaimers to make
certain of what FCM you are going to do business with because
there is a risk. So, again, Madam Chairwoman, that would be
something that would be an extreme moral hazard for the CME to
try to make up $158 billion of customer segregated monies.
Chairwoman Stabenow. You mentioned earlier on the
securities side that there is SIPC, there is an insurance
system. And it is a little early, I think, probably to spend
too much time--we are not sure where all the recommendations
are going to go, but one question that we have been asked a
number of times is: Should there be an insurance system like
that is on the commodity side for commodities customers? Do you
have any thoughts on that?
Mr. Duffy. I think you are talking about trying to have an
insurance system that would be in the hundreds of trillions of
dollars of notional value to insure. The premiums would be so
astronomical it would never meet the payout of what it could
be. So I do not know that is something that would be
beneficial. There may be something you want to look at and,
again, preliminary at best, smaller farmers, ranchers, pure
hedgers of the product, they may want to look at different
types of accounts for them that could be managed differently. I
do not know.
Chairwoman Stabenow. Okay. Thank you.
Commissioner Sommers, Chairman Gensler testified at our
last hearing that the CFTC did not examine a single futures
commission merchant, referencing the duty of the front-line
regulators like the CME. Can you confirm that information? And
should the Commission audit or examine every futures commission
merchant? If we are to go down that path, does the CFTC have
enough resources to do that? I think I probably know the answer
to that one, but is that a path that the CFTC is looking at or
would look at?
Ms. Sommers. So currently the way it works, we have
authority over the DSROs. The FCMs are registered with us, but
the DSROs are the front-line auditors. We do periodic reviews
of the DSROs and look at the reviews or the audits that the
DSROs do of FCMs. So we may go in and do spot audit checks of
FCMs that a DSRO has already reviewed to see what our own
results would be of that type of audit to make sure that the
DSRO is doing their job. If we find any inadequacy in the job
that the DSRO has done, we make recommendations to them to
improve their systems.
Chairwoman Stabenow. After this investigation is done, are
you open to recommending new authorities or tightening up
current protections to prevent a similar situation from
occurring again?
Ms. Sommers. Absolutely. I think there is no doubt that
after the investigation is concluded and we look back to know
exactly what happened, there will be a number of lessons
learned and a number of different recommendations that we can
bring to you for your consideration.
Chairwoman Stabenow. Is it true that if a firm invests
customer money right now and the investments decrease in value,
the firm is responsible for the loss, not the customer?
Ms. Sommers. That is right. If the firm is investing under
Regulation 1.25 and there is a loss in value of those
instruments, the FCM has to make up the loss of customer money.
Chairwoman Stabenow. Thank you very much.
Senator Roberts?
Senator Roberts. I beg the indulgence of my colleagues. CME
has said in the last few days, Mr. Duffy, of MF Global it saw
several transactions that ``did not follow a straight path.''
What did you mean by that?
Mr. Duffy. I am not aware of that exact quote, ``did not
follow a straight path.'' It may be in my written testimony,
but I am assuming--no, it is not in my written testimony. I did
not think it was. I do not recall hearing anything about
following a straight path.
Senator Roberts. I wonder where that came from.
Mr. Duffy. The only thing I can say, sir, is I did say that
they gave us a segregated report that showed $200 million to
the good, and then they gave us the same segregated report 4
days later, dated from the week before, that showed a $200
million deficiency. So maybe that is where that language came
from.
Senator Roberts. Well, then you saw several transactions
that followed a very rocky path.
Mr. Duffy. Fair enough.
Senator Roberts. On November 2 in a press release, you
said, ``It now appears that the firm made subsequent transfers
of customer segregated funds in a manner that may have been
designated to avoid detection insofar as MF Global did not
disclose or report such transfers to the CFTC or CME until
early morning on Monday, October 31.'' How was this information
disclosed to you by MF Global?
Mr. Duffy. I will go back to what I said a moment ago,
Senator. That press statement that we put out, a lot of it was
based on the false segregated reports that we received and now
we are aware of.
Senator Roberts. What exactly did MF Global tell you?
Mr. Duffy. I was not there, sir. Obviously, this was 2
o'clock in the morning. I found out about it 8 o'clock the
following morning. I was only told that they came to us and the
CFTC saying, ``Stop looking for the so-called accounting error.
There was $950 million transferred out of customer segregation
to the broker-dealer account.'' That is what I was told from
our--through our reports.
Senator Roberts. Was this before or after the company had
been placed into bankruptcy?
Mr. Duffy. This was prior to. I think the company went into
bankruptcy the following day--or actually it would have been
the same day.
Senator Roberts. Well, for the entire panel--I am sorry?
Mr. Duffy. It would have been the same day because it
happened in the middle of the night.
Senator Roberts. It seems to me that to figure out where
the money went, once you go back to the time when one knew for
sure that the money was there, try to trace its path forward in
time--it is time-consuming, it could be done. And that would
take quite a number of people. I understand the Department of
Justice is involved in the investigation, locating the money
through the FBI and through the offices of two U.S. Attorneys.
CME has its own auditors, of course, and the CFTC is directly
involved.
Mr. Giddens, as trustee you have got your own team. It
seems to me there are a lot of cooks in the kitchen. Who is in
charge of this posse that we have arranged here to find out the
truth? Are there too many members of the posse that you have
not been able to find the money? Or are you satisfied that you
are all talking with one another and it is a pretty smooth
operation?
Mr. Giddens. I think it is a very cooperative operation.
The potential law enforcement investigation is led by the
Department of Justice and the U.S. Attorneys in New York and
Chicago, and they are taking the lead on that.
My principal investigation is really to look at the
transfers and try to find potential sources of recoveries to
bring back the monies for customers. I do not have a role in
the law enforcement aspect of this. There are frequent
meetings, and there is cooperation, full cooperation from us.
No one is asserting privilege or withholding any kind of
information. And I think it is working well with the CFTC.
Now, the SEC also is interested in this because there were
transfers and transactions relating to segregated securities
accounts and the like. I think all of the independent
regulators--I do not think bodies are stumbling over bodies or
there are too many people to be there.
I think in terms of a conclusion of what happened, it is a
complicated analysis, and I think it is fair to say it is more
than just looking at transactions in the last few days. I think
it is looking, whether it is relevant or not, for transactions
and transfers that went over several months and are really
hundreds of thousands of reconstructions of things to do.
As I indicate, there is no magic source of where the money
is. There is no depository, there is no counterparty or anyone
who is sitting with, you know, $600 million that we have
identified. I do not think that is going to happen. I think we
have collected the available assets, and we have already
distributed nearly 80 percent of that with our--we have other
constituencies. With the last transfer motion, there were more
than 25 objections, including objections from the U.K.
administrator, including from the creditors committee of the
holding company who were opposed to our distribution on the
grounds that we may be distributing assets which belong to
other creditors or other parties.
So as I say, I think the analysis of the business practices
of the firm and whether they were solvent or insolvent is going
to take some time. But I do not think it is going to magically
come to a pot of gold at the end of the rainbow immediately.
Senator Roberts. I appreciate your candor, and I think Mr.
Duffy has something to add.
Mr. Duffy. Senator, I just want to make it clear that the
CME is obviously cooperating with the authorities, but also the
CME has been instructed by both the CFTC and the Department of
Justice not to conduct its own investigation. All the
information I have given you is by interviews that we have
conducted internally of our own employees. So I just want to
make sure that was clear for the record.
Senator Roberts. I appreciate that.
I yield back, Madam Chairwoman.
Chairwoman Stabenow. Thank you.
Senator Klobuchar?
Senator Klobuchar. Thank you very much, Madam Chairman.
Thank you to all of you.
Mr. Duffy, I was actually asking Mr. Corzine and MF Global
witnesses about the statements that you had made and your
understanding of what had happened. And in your testimony you
give what I would consider the most detailed account I have
heard to date as to when and how the customer funds were
missing. From your testimony do I correctly understand that it
is your belief that the customer funds were illegally
transferred out of segregation on October 27th, Thursday, and
Friday, October 28th?
Mr. Duffy. We were told that the customer funds were
transferred from the customer segregation to the broker-dealer,
and those are not excess customer funds. That is a violation of
the rules. So, yes, that is correct.
Senator Klobuchar. And then this new information we got
today, I just want to go over that. Was that one of those
transfers or is that from another--this loan, $175 million loan
to the European affiliate?
Mr. Duffy. I am unaware of what it was other than what I
was told over the weekend by our lawyers by an e-mail and a
conversation afterwards that Mr. Corzine was aware, because our
employee had heard this, talking to another--was on the phone
with the European affiliate, and the European affiliate--they
were telling them to send back the $175 million, and the woman
said that Mr. Corzine is aware of these loans.
Senator Klobuchar. And this was a woman at MF Global?
Mr. Duffy. MF Global, yes.
Senator Klobuchar. And who is this woman?
Mr. Duffy. I do not have her exact name, and I do not want
to----
Senator Klobuchar. All right. And so----
Mr. Duffy. I told Senator Roberts I will give it to the
Committee afterwards.
Senator Klobuchar. Okay. Very good. And so she told an
auditor with CME about this?
Mr. Duffy. Yes, the auditor of CME was in the room while
she was on the phone.
Senator Klobuchar. And it was a $175 million loan to what
European affiliate?
Mr. Duffy. I have no idea, ma'am.
Senator Klobuchar. Okay. And then I know that Senator
Roberts just asked you about that, but in your testimony, you
said the transfer of segregated funds--this is a quote: ``The
transfer of segregated funds out of the appropriate accounts
was disguised from all regulators.'' And I actually engaged a
little in the previous panel about disguising and what they are
required to do with the disclosures and the repo disclosures
and those kinds of things. Can you explain further why you
chose to use the word ``disguised''?
Mr. Duffy. Sure. Because as I said in my testimony and to
Senator Roberts, we were tying out--which means that we were
validating the segregated funds--from Wednesday's statement
through Thursday and Friday; we had 80 to 90 percent of the
tie-out done to show that segregated funds were basically
intact. This is on Friday, but it is based off of Wednesday's
report.
Then they gave us another report. First, the report showed
they had--their report showed $200 million in excess. And then
they gave us another report 4 days later after bankruptcy with
the same date prior that shows a $200 million deficit. So,
clearly, they gave us two different reports from the same day
with a $400 million swing, and we had tied out 80 to 90 percent
of the funds being there on Friday from Wednesday's report.
Senator Klobuchar. So this is a different issue then when I
talked to him about the reporting to the SEC about where the
funds went. This is during this weekend that you are talking
about.
Mr. Duffy. Yes. I am talking about this work was being done
on Thursday or Friday off of Wednesday's report, and then the
report that they gave us was revised on Monday.
Senator Klobuchar. Okay. Mr. Duffy, in your testimony you
stated that, according to the information you have, you believe
that there might be a shortfall in segregated funds of between
13 percent and 19 percent. Has that changed at all or is it
more defined?
Mr. Duffy. Well, I do not know about the percent. I am
going off dollars, so I know.
Senator Klobuchar. Yes, I wondered where that rested with
the $1.2 billion figure that Mr. Giddens and his team----
Mr. Duffy. We are estimating a shortfall of between $700
million and $900 million.
Senator Klobuchar. Okay. So that is less----
Mr. Duffy. So that is, you know, $550 million is 10 cents,
so you can do the math from there.
Senator Klobuchar. Okay. Mr. Giddens, for this difference,
what is this difference about between what Mr. Duffy----
Mr. Giddens. There are three segregated funds. I think Mr.
Duffy is referring only to the U.S. futures when he gives his
figure of up to $900 million. I am also referring to the
segregated accounts with foreign futures and also segregated
securities accounts.
Mr. Duffy. For the record, ma'am, I am referring to U.S.
Senator Klobuchar. Got it. And then, Mr. Giddens, I know
this was incredibly complicated and I guess there was some poor
maintenance of the records in the last few days. Are you
confident that at the end of the day you are going to be able
to account for all the transactions in and out of segregation
from start to finish?
Mr. Giddens. Well, that is what we are trying to do over a
several-month period, and I have very good folks working for me
from Deloitte and Ernst & Young who are trying to reconstruct
this.
Senator Klobuchar. And so what I understood from reading
your previous testimony, something like 72 percent of the money
will go back to people like Mr. Tofteland for sure that are
victims of this colossal collapse here.
Mr. Giddens. Yes. The Commodity Exchange Act requires me to
give the same pro rata distribution to every customer, and
after this distribution, each customer should have received 72
percent of the value in their account.
Senator Klobuchar. All right. And how about above that?
Under what circumstances could customers who had their funds in
segregated accounts not be made whole?
Mr. Giddens. If we continue to have a shortfall in total
assets. It is my intention to make further distributions
through the claims process as promptly as possible, and it
depends on the total recovery of assets that we have. If we
have only the assets we have at present, there will be a
shortfall. And it is my goal or aspiration through litigation
or otherwise, if possible, to make up that shortfall.
Senator Klobuchar. With the clawback or finding some ways
to find this money?
Mr. Giddens. Yes.
Senator Klobuchar. Okay. And so what do you see as the
timetable now? You have got that distribution of the 72
percent, and you have determined what the shortfall is. So what
should we tell our farmers?
Mr. Giddens. Well, the time for filing claims expires on
January 31st, and by that time we should have a picture of all
the claims. We have just an estimate.
For example, a U.K. administrator had an account with MF
Global U.S. of several hundred million dollars in an omnibus
account. We have not distributed anything on that.
There are also other subsidiaries around the world. There
are also other potential creditors. And until the claims
process is completed, we will not know with assurance what the
claims are. But we have and we are very grateful for the CME
guarantee because that has given us some assurance that we
could proceed with fairly substantial distributions without
knowing in reality what our total assets are and what the total
claims will be allowed.
Our intention is to do that as quickly as possible and to
make further distributions as quickly as it appears comfortable
to us, to the CFTC, and, of course, eventually we have to
persuade the bankruptcy court to approve these transfers in the
interest of all the parties in the bankruptcy.
Senator Klobuchar. Thank you very much, and I know I have
talked with you, Commissioner Sommers, before, and if we have
any more questions, especially about that timetable, we will
follow up in writing. I appreciate it.
Thank you.
Chairwoman Stabenow. Thank you very much.
Senator Boozman?
Senator Boozman. Thank you, Madam Chair.
Mr. Duffy, did you get a chance to hear the testimony of
Governor Corzine and his associates?
Mr. Duffy. I did.
Senator Boozman. Was the testimony that you heard
consistent with the facts that you have uncovered in your
investigation?
Mr. Duffy. I am not a lawyer, sir. The only thing I can
tell you is we were told by MF Global that they transferred
money from customer segregated accounts to the broker-dealer,
stop looking for the accounting error.
I can also only tell you that one of our employees was on a
call with one of their employees when they said Mr. Corzine was
aware of the loans being made from segregated accounts.
Senator Boozman. Okay. Very good.
Ms. Sommers, again, it is remarkable. You mentioned Lehman
Brothers and things like this. Is this unique, this sort of
thing happening, certainly to this extent? But is it unique in
itself
Ms. Sommers. Yes, it is, sir, for the customer funds to be
missing.
Senator Boozman. Okay. You mentioned customers. How do we
differentiate between what is and what is not customer dollars?
Mr. Duffy. The customer funds on the FCM side would be put
in a 4d segregated account, and those accounts would be tagged
as 4d segregated accounts.
Senator Boozman. And the money that they discovered
outside?
Ms. Sommers. There could be money in a lot of other
accounts outside of 4d. There could be house proprietary
accounts, broker-dealer accounts, the foreign future accounts,
which we take at 30.7 accounts.
Senator Boozman. Okay. Very good.
Mr. Giddens, the $550 million guarantee, is that money--is
it going to be used to make customers whole if we cannot find
the shortfall?
Mr. Giddens. That is not the nature of the guarantee. The
guarantee, which we are grateful for, is not a sum of money or
an additional sum of money. If we make the mistake and it turns
out at the end of the day the proper pro rate distribution is
75 percent and we have given out 80 percent to somebody or to
others, the money could be used to cover that deficiency. So
Mr. Duffy may----
Mr. Duffy. That is not quite correct either. What is
correct is CME has said to the trustee, Pay up to 75 cents for
every dollar, and if you end up only having 60 cents or 65
cents, we will make up to 10 cents. So we do not go above the
75-cent number, as Mr. Giddens was referring to. Maybe we are
saying the same thing in a different way.
Mr. Giddens. I think we are.
Mr. Duffy. But it is basically CME--if he pays up to 75
cents, finds out he does not have 75 cents, has 70, then we pay
$250 million to him. If he has 65, we pay another $250 million
to him. If he has 60, he is on his own after that.
Senator Boozman. I see. Okay. Thank you, Madam Chair.
Chairwoman Stabenow. Thank you.
Senator Hoeven?
Senator Hoeven. Thank you, Madam Chairman.
I would like to start with Mr. Duffy. Would you feel that
it is fair to say that either customer money was moved from
segregated accounts to the company accounts for use by the
company or there is an accounting error here or we are going to
find the dollars? Would you say it is fair that one of those
three scenarios needs to--either is the case or will be the
case?
Mr. Duffy. I do not know if I could say that because I can
only tell you what I have been told, sir. We were told--not me
personally, but our staff was told there is no accounting
error. So I have to take that off the table. I was told there
was money moved from customer segregated funds to the broker-
dealer account. That is what we were told.
Senator Hoeven. You indicated $200 million?
Mr. Duffy. No, sir; $950 million was moved out of customer
segregated accounts to the broker-dealer. What I was referring
to on the $200 million was a customer segregation report from
the week prior that showed them having excess of customer
monies, $200 million of their own monies in the segregated
pool. And then that was revised down to be a $200 million
deficit a week later or 5 days later.
Senator Hoeven. So your auditors indicated that the dollars
were transferred from the customer segregated accounts to the
firm's accounts?
Mr. Duffy. No, sir. Our auditors were told by MF Global
that is what MF Global did, to stop looking for the accounting
error.
Senator Hoeven. What authority did they have to make those
transfers?
Mr. Duffy. I do not know if they were the ones that made
the transfers or not, sir. All I am telling you is they told
our auditors stop looking for an accounting error, they moved
the money out of segregation.
Senator Hoeven. And that was on what date?
Mr. Duffy. October 31st, 2:00 a.m. in the morning.
Senator Hoeven. So would it be your expectation that the
investigation led by the DOJ in tandem with your help, the
CFTC, the SEC, the trustee and everyone involved here, that
they would then be able to determine the amount that was
transferred, when it was transferred, who authorized the
transfers?
Mr. Duffy. We have given them pretty much all the
information we had, sir. We were not part of the investigation.
We have been asked not to be by both the CFTC and the
Department of Justice.
Senator Hoeven. Based on your earlier testimony, you felt
that this was not a system failure but, rather, that somebody
violated the system.
Mr. Duffy. There is somewhere between $700 million and $1.2
billion, to Mr. Giddens' recollection. It is literally 6 or 7
weeks later. The money is not there yet. So the money appears
to be missing.
Senator Hoeven. Commissioner Sommers, would you give me
your thoughts on the same issue, system failure versus somebody
violating the rules, and then also your sense of how soon we
will be able, through the investigative process, to determine
what happened, who is accountable?
Ms. Sommers. The first part of the question: I think it is
a little bit premature for us to make determinations about
whether the system failed until we know exactly what happened.
After we have a chance to go over all the facts and
circumstances of the case, obviously we can decide whether or
not there were any parts of the system that failed in this
instance.
The second part of your question, how long it may take to
follow the trail, just to assure the Committee that we will
follow, you know, every single lead in this investigation, both
the law enforcement side of the investigation as well as
tracing where every penny of the money went, but it is
complicated. And while you may know that a certain amount of
money could have been transferred out of the FCM at one time,
that money being transferred could have splintered into
thousands of different accounts after it was transferred out of
the FCM. And we have to trace to make sure which of those
transfers were legitimate versus illegitimate transfers.
If a customer on the FCM side had money that they asked to
be transferred to the broker-dealer, that would be a legitimate
transfer, and we would have to follow any supporting
documentation that is with MF Global to know which of those
transfers are legitimate versus illegitimate. So while we have
a very good idea at this point about what had happened, it is
painstakingly difficult and complex to follow every single
transfer of this money.
So, you know, we are working closely with the trustee and
the forensic accountants to make sure we get every single
detail unveiled.
Senator Hoeven. Mr. Duffy?
Mr. Duffy. You know, Senator, maybe I did not answer your
question properly, but I believe I am the only one in two
hearings now that is giving a timeline of sequence of events
that we know. I do not believe it is a system failure only
because of the timeline we have walked through.
Then when the question was asked today to the earlier
panel--I think Senator Boozman asked me a question, was I
paying attention to the other panel. When the Senator from
Minnesota asked was my statement correct that they were told
that monies were transferred out of customer segregated into
the broker-dealer account, nobody refuted that of the three
participants that I saw.
So we are the only ones that have shown a timeline. I do
not believe there is a system failure here. So maybe I did not
answer your question properly. I think something--I think there
was a violation of the rules. Again, I am not a judge, jury, or
lawyer. I am just telling you we gave a chronological order of
events here, sir, to show that it is not a system failure.
Senator Hoeven. I understand you are saying that you do not
feel it was a system failure, which I think means that either
transfers were made inappropriately or there is an accounting
error. But you indicated that you were told it was not an
anything error, that transfers were made.
Mr. Duffy. That is exactly what I said, sir.
Senator Hoeven. Mr. Duffy, in terms of the ability to
recover--because some of the earlier testimony was, well, this
may be an accounting error. And certainly there should be
controls in place so you do not have this type of accounting
error, which is, you know, properly part of the system. But
whether it is accounting error or whether there were
unauthorized transfers, Mr. Giddens, will that affect, in your
opinion, the ability to get full recovery for the customers of
MF Global?
Mr. Giddens. If it were simply an accounting error, then
presumably it could be corrected and you would have the funds.
We are basing our analysis on what actual dollars are there
against estimated claims, and there is a substantial shortfall.
I should say while the technical investigation by the
Department of Justice will be thorough, and by the regulators,
it may take months, that is not going to deter us if we see a
source of funds that we think should come back into the estate
from pursuing that. In fact, we have already made demands of
counterparties who closed out transactions for accountings
into--and, in fact, we have recovered some small amount of
money.
So what I am saying is we will be proactive immediately,
and even though the investigation in its formal sense may take
many months before anybody can unravel the thousands if not
hundreds of thousands of transactions--and we will be doing all
we can as the members of this Committee have encouraged us to
do to pursue dollars to make people whole--I am certain that
the distribution will be more ultimately than 72 cents. How
much I cannot really say at this point.
Chairwoman Stabenow. I think that is a good place to end--
yes?
Senator Hoeven. I do have a follow-up question. I can wait
or--but I would like to have a follow-up question.
Chairwoman Stabenow. We do have--we are needing to bring
the hearing to a close. I wonder if you might either do that
quickly or put it in writing.
Senator Hoeven. Just one more to follow up.
Chairman Stabenow. Very quickly.
Senator Hoeven. For Mr. Giddens, $1.2 billion is the
shortfall. You anticipate--just take me through the math real
quick so that we can communicate with folks who are out the
money. The Senator from Minnesota talked with you about the
timeline, but just take me through the number, the $1.2
billion, you anticipate 72 percent recovery. How much of that
is paid out? When do you expect more payout? And then are we
talking about the difference of roughly $300 million is what
you anticipate the shortfall to be at this point?
Mr. Giddens. No, Senator. We will have distributed $4.2
billion. The bankruptcy court entered the order on Monday, and
with the CME and with the CFTC, we have put in place a
mechanism to start making distributions, and actually the first
distribution should go out tomorrow. That process will take,
estimated with the CME, 2 to 4 weeks before all of the money is
out.
When that is completed, that distribution should give every
person 72 percent of their claim. If their claim were for $1
million, they should get $720,000. The shortfall, the $1.2
billion, is an estimate, and that is based on what we see as
estimated claims against three segregated pots: one for
securities customers; one for the U.S. folks who transacted in
foreign futures, such as on the London Metals Exchange; and
then the largest pot of that, which is under the CME
jurisdiction, are U.S. futures. The combination of those three
pots of assets, what we actually have and what we have
collected, is what leads us to the approximate $1.2 billion.
Senator Hoeven. Thank you.
Chairwoman Stabenow. Thank you very much, and we thank all
of you for coming today. This has been a very, very important
hearing, and we have received answers. Also, I have more
questions. And so as I indicated in my opening statement, we
have three goals as we continue to look into this situation:
getting the customers' money back, and, Mr. Giddens, we are
counting on you to stay laser-focused on that, as I am
confident that you will; holding anyone accountable for any
wrongdoing; and ensuring that proper customer protections are
in place to make sure this does not happen again.
I will just reiterate that any policy changes will come
through this Committee, and we will continue to examine the
collapse of MF Global. And we have heard today from customers
who are very worried about using the futures markets, and that
is, frankly, not acceptable. It is the duty of our Committee
and all of you and the regulators to ensure that the markets
are safe and sound and that there is, in fact, confidence in
the system. And so we look forward to working with you to make
sure that happens.
Thank you very much. The meeting is adjourned.
[Whereupon, at 5:03 p.m., the Committee was adjourned.]
=======================================================================
A P P E N D I X
DECEMBER 17, 2011
=======================================================================
=======================================================================
QUESTIONS AND ANSWERS
DECEMBER 17, 2011
=======================================================================