[Congressional Record Volume 157, Number 192 (Wednesday, December 14, 2011)]
[House]
[Pages H8962-H8965]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
MF GLOBAL
The SPEAKER pro tempore. There being no majority Member to be
recognized at this time, under the Speaker's announced policy of
January 5, 2011, the gentlewoman from Ohio (Ms. Kaptur) is recognized
for 30 minutes.
Ms. KAPTUR. I thank the Speaker.
Let me rephrase this. At the hearing, the Commodity Futures Trading
Commission's Jill Sommers' testimony was invaluable to the public. Her
testimony places the MF Global collapse in proper perspective, and I'm
quoting directly. She said:
``Lehman Brothers and Refco are the two most recent futures
commission merchant bankruptcies. 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 open positions and all associated
segregated collateral. That being the case, customer accounts were
promptly transferred to healthy FCMs''--or futures commission
merchants--``with the commodity customers having no further involvement
in the bankruptcy proceeding. Unfortunately, that is not what happened
at MF Global because customer accounts were not intact.''
The fact that ``customer accounts were not intact,'' as Commissioner
Sommers described it, means that someone took other people's money. I
believe most of us would call that theft. Even if some of the money is
recovered by the bankruptcy process, that does not alter the fact that
the process by which customer accounts were violated broke the law.
[[Page H8963]]
It is an understatement to say that many American families and
businesses lost important investments. The mismanagement of this one
firm has put hundreds of people's investments in jeopardy. They deserve
answers. Congress has lead responsibility to ask hard questions, and
here are some questions that demand reply.
On transfers of funds from customer accounts, Congress must ask
examiners from Chicago Mercantile Exchange Group, who said that
transfers at MF Global were made ``in a manner that may have been
designed to avoid detection,'' so let us ask: Should the person or
persons who attempted to avoid this detection be held accountable, and
how should that occur? It seems unlikely Mr. Corzine is not
responsible. So which person, or persons, at MF Global made the
decision to invade customer accounts? Congress must assure full tracing
of those transactions.
A second group of questions should revolve around who are the
responsible parties. If Mr. Corzine simply cannot recall or does not
know what happened at MF Global, as he seemed to claim, who should
Congress and investigators speak with at MF Global to ascertain his
exact role and those of other top executives? Who's going to probe?
That's the role of a congressional investigatory committee.
Who, besides Mr. Corzine, was directly responsible for segregating
customer account funds from MF Global funds? Over $1 billion did not
walk off on its own. Some set of persons at MF Global moved those
funds, and it's highly implausible that no one authorized that action.
So what set of persons authorized those actions exactly?
Another set of questions should revolve around who approved MF
Global's risk standards? We know that Michael Roseman, MF Global's
former chief risk officer who resigned in March 2011, reportedly
assessed that the strategy that MF Global was undertaking was too
risky. Any assertion that the strategy was prudent at the time, as Mr.
Corzine is arguing, is against the facts of history because MF Global
went bankrupt. Congress needs to take whatever steps are necessary to
find out exactly who pressured Mr. Roseman to resign for blowing the
whistle on the behavior inside that company.
Another set of questions can be asked about what other financial
partners participated in MF Global's trades. There are allegations that
the transfer of $200 million to J.P. Morgan in the final days of MF
Global was suspected by J.P. Morgan bankers of utilizing MF client
funds. To what extent are these allegations true? At what point can we
determine whether wire fraud was committed and, if so, by whom and to
what extent? All of this begs the ultimate question of whether or not
sufficient protections were exercised for customers to stop wire fraud.
Another set of questions can revolve around were any inside players
aiding and abetting MF Global's behavior. We know that current
Commodity Futures Trading Commission Chairman Mr. Gensler has recused
himself from the case. Mr. Gensler actually worked for Mr. Corzine at
Goldman Sachs, and they apparently carried on later in the same social
and academic circles. The public has a right to know at what point Mr.
Gensler had any knowledge or reason to believe that the customer
accounts at MF Global might not have been intact; and then, how did he
and his agency and his staff respond--day by day, hour by hour, email
by email?
Finally, according to Reuters, companies like Koch Industries removed
billions from MF Global just before it filed bankruptcy. How did that
powerful company know when to take their money out and why did my
constituents not know when to take their money out? Could, in fact,
Koch Industries have gotten the same tip-off that Goldman's CEO Hank
Paulson had given Freddie Mac investors and Fannie Mae investors just a
few years before? How much of MF Global's money not wired rightfully
belongs to the holders of segregated accounts that were inappropriately
tapped by MF Global? How do my constituents get full restitution?
Yes, there are far too many questions--lots of questions--and far too
few complete answers.
Yes, this Congress needs to take white collar crime more seriously.
Who would accept an explanation, as we heard the other day, that ``I
did not intend to steal.'' It could be $100 from the corner gas
station, right? How can that be an acceptable answer for taking
hundreds of millions and over $1 billion?
Rigorous investigation matters. Congress needs more robust hearings.
We need more thorough investigations.
{time} 2130
What should concern all of us is that the financial industry's fraud
and imprudence, yes, addictive behavior, is not limited to a case here
or there. In the financial services sector, fraud has become systemic.
It is endemic. It has harmed our Nation's economy to its vitals and has
hurt millions of people across our country and the financial systems of
other countries.
In 2009, the FBI testified before the House Judiciary Committee that
the current financial crisis, and I'm quoting directly, ``has produced
one unexpected consequence: it has exposed prevalent fraud schemes that
have been thriving in the global financial system. These fraud schemes
are not new, but they are hitting the economy hard and the public is
hurting as a result of market deterioration.''
What a true statement. Regretfully, this isn't the first time that
our country has seen a crime wave in the financial services industry.
Indeed, the crimes and addictive behavior seem to be getting bigger,
not smaller.
In the 1980s, it was the savings and loan crisis. Then the FBI
responded with a staff of 1,000 agents and forensic experts based in 27
cities.
Do you know how many they had over there when this started? Forty-
five. You could count them on your own hands.
Perpetrators went to jail back then but, rather, the Congresses at
that time ignored the warnings of what had happened, and they gave an
even bigger green light during the 1990s to more abuse by removing the
rules of the road for banking during the 1990s.
Example, the upending of the Glass-Steagall Act in the late 1990s
that blew the lid off prudent banking and allowed bankers and
speculators to be in the same company. And look what has happened. We
need to restore the Glass-Steagall Act, and I have a bill to do that,
and there are dozens and dozens of cosponsors on that bill.
In 2000, the surreptitious undermining of derivative regulation by
this Congress led to Wall Street's bullish plunder that we are now
experiencing again, the result of addictive behavior of the 2000s.
You know, when you go back to the savings and loan crisis, that was
much smaller than what we are enduring today. That is why I have a
straightforward bill, H.R. 1350, the Financial Crisis Criminal
Investigation Act. It authorizes an additional 1,000 agents and
forensic experts for the white collar crime division of the FBI to
investigate and prosecute these financial crimes. I encourage all of my
colleagues to join me as a cosponsor. The Bureau does not have anywhere
near the resources it needs to take on crimes of this magnitude and
dimension.
Congress has long debated what level of regulation is needed to
restrain financial addicts. There should be no debate about the need to
uphold the law, to recover innocent people's money, to prosecute the
addicted gamblers, to set a strict standard of behavior in the
financial sector so it simply never happens again, so that we can
restore confidence and regular order, not insider abuse, to America's
financial markets.
I think this Congress has an awesome responsibility to do its job,
and it should not fear anyone. The committees of this House should be
working overtime to probe the truth, to find the truth, to get at the
truth of those who have harmed America, that have put so many millions
of people out of work, where so many homes have been foreclosed that
the property values of this country can't even find their footing at
this point.
It's affecting capital formation; it's affecting the ability of local
banks to make loans because they're not sure what's going to happen to
valuation on their books. What could be more serious than the
committees of this Congress doing their job?
I want to commend Congressman Lucas of Oklahoma. I want to commend
Congressman Peterson of Minnesota. Wouldn't it be wonderful if
[[Page H8964]]
they could continue their important work, but that the other committees
of this Congress that have responsibility for oversight, Government
Oversight and Reform, the Judiciary Committee, the Financial Services
Committee, the Energy and Commerce Committee, were actually to do the
work that needs to be done to put this country's banking and financial
system back in a decent position with prudent rules and to finally
quash the addictive behavior that has brought our country to this very
dangerous point?
[From The New York Times, Dec. 11, 2011]
A Romance With Risk That Brought On a Panic
(By Azam Ahmeo, Ben Protess and Susanne Craig)
Soon after taking the reins of MF Global in 2010, Jon S.
Corzine visited the Wall Street firm's Chicago offices for
the first time, greeting the brokers, analysts and sales
staff there.
One broker, Cy Monley, caught Mr. Corzine's eye. Unknown to
MF Global's top management in New York, the employee, whose
job was to match buyers and sellers in energy derivatives,
was also trading a small account on the side, using the
firm's capital.
``How are you making money on side bets? What else are you
guys doing to make money here?'' Mr. Corzine asked
enthusiastically, his eyes widening, the broker recalled. The
new chief executive grabbed a seat and spent an hour
questioning Mr. Monley as other top executives from New York
hovered impatiently nearby.
Although Mr. Corzine had been a United States senator,
governor of New Jersey, co-head of Goldman Sachs and a
confidant of leaders in Washington and Wall Street, he was at
heart a trader, willing to gamble for a rich payoff.
Dozens of interviews reveal that Mr. Corzine played a much
larger, hands-on role in the firm's high-stakes risk-taking
than has previously been known.
An examination of company documents and interviews with
regulators, former employees and others close to MF Global
portray a chief executive convinced that he could quickly
turn the money-losing firm into a miniature Goldman Sachs.
In the final days before filing for bankruptcy, MF Global
moved an estimated $1.2 billion of customer funds to other
institutions.
He pushed through a $6.3 billion bet on European debt--a
wager big enough to wipe out the firm five times over if it
went bad--despite concerns from other executives and board
members. And it is now clear that he personally lobbied
regulators and auditors about the strategy.
His obsession with trading was apparent to MF Global
insiders over his 19-month tenure. Mr. Corzine compulsively
traded for the firm on his BlackBerry during meetings,
sometimes dashing out to check on the markets. And unusually
for a chief executive, he became a core member of the group
that traded using the firm's money. His profits and losses
appeared on a separate line in documents with his initials:
JSC.
After joining MF Global, Jon S. Corzine invested heavily in
the debt of troubled European countries.
Yet few appeared willing to check Mr. Corzine's trading
ambitions.
The review of his tenure also sheds new light on the lack
of controls at the firm and the failure of its watchdogs to
curb outsize risk-taking. The board, according to former
employees, signed off on the European bet multiple times. And
for the first time it is now clear that ratings agencies knew
the risks for months but, as they did with subprime
mortgages, looked the other way until it was too late,
underscoring how three years after the financial crisis,
little has changed on Wall Street.
MF Global filed for bankruptcy on Oct. 31. As the firm spun
out of control, it improperly transferred some customer money
on Oct. 21--days sooner than previous y thought, -F.-s-gd
people briefed on the matter. And investigators are now
examining whether MF Global was getting away with such
illicit transfers as early as August, one person said, a
revelation that would point to wrongdoing even before the
firm was struggling to survive.
The consequences of the firm's collapse have been severe:
Some $1 billion in customer money remains missing and
thousands of clients, including small farmers in Kansas or
hedge funds in Connecticut, still do not have nearly a third
of their funds.
Some of that money may never be recovered if, as some
regulators now fear, MF Global used it to cover trading
losses and replenish overdrawn bank accounts.
The bet on European sovereign debt is not thought to be
directly connected to the missing money. But the fears about
the firm's exposure to Europe tipped an anxious market,
causing a run on MF Global that regulators suspect led the
firm to fight for its life using customer money.
Mr. Corzine has not been accused of any wrongdoing. Through
a spokesman, he declined to comment for this article.
While Mr. Corzine apologized for the firm's collapse when
he appeared before the House Agriculture Committee on
Thursday, he has continued to defend the European trade,
calling it ``prudent'' at the time.
The European trade was initiated by Mr. Corzine late in the
summer of 2010. The new chief executive explained the bet to
a small group of top traders, arguing that Europe would not
let its brethren default. In just a few months, the trade
swelled to $6.3 billion, from $1.5 billion.
Europe's debt crisis, meanwhile, continued to flare,
raising questions about whether some of the Continent's
bigger economies, Spain and Italy, might be ensnared in the
maelstrom.
In August, some directors questioned the chief executive,
asking him to reduce the size of the position. Mr. Corzine
calmly assured them they had little to fear.
``If you want a smaller or different position, maybe you
don't have the right guy here,'' he told them, according to a
person familiar with the matter. He also told one senior
board member that he would ``be willing to step down'' if
they ``had lost confidence in me,'' Mr. Corzine told Congress
on Thursday, although he said he had not intended to make a
threat.
The board relented.
A Curious Career Move
Few would have guessed that Mr. Corzine, having led Goldman
Sachs before serving in the Senate and as a governor of New
Jersey, would wind up the chief executive of a little-known
brokerage house.
At Goldman, which he joined in 1975, the young bond trader
quickly gained a reputation as someone able to take big risks
and generate big profits. Even after ascending to the top of
the firm, he kept his own trading account to make bets with
the firm's capital. In 1999, Mr. Corzine was ousted from
Goldman amid a power struggle.
By 2010, having suffered a stinging defeat in his bid for
re-election as the Democratic governor of New Jersey, Mr.
Corzine hoped to resume his career on Wall Street.
A friend, J. Christopher Flowers, one of MF Global's
largest investors, helped him get there. Mr. Corzine and Mr.
Flowers worked at Goldman decades ago, and at one point, Mr.
Flowers helped manage Mr. Corzine's vast wealth while he was
a senator, according to Congressional records.
Mr. Corzine's arrival was a coup. MF Global had hired an
executive search firm, Westwood Partners, to hunt for a new
leader. But some members of the board, including David I.
Schamis, who worked for Mr. Flowers, were recruiting Mr.
Corzine.
He was a popular manager, former employees say. An
avuncular presence with a beard and sweater vest, he had a
knack for remembering names. Even in the firm's final hours,
they recall that Mr. Corzine never lost his temper. His work
ethic also impressed colleagues. He often started his day
with a five-mile run, landing in the office by 6 a.m. and was
regularly the last person to leave the office.
His intense routine was on par with his ambitions for the
firm. With 15 top executives in the firm's boardroom on his
first day, March 23, 2010, he said, ``I think this firm has
tremendous potential and I can't wait to get started,'' one
person who attended said.
Mr. Corzine faced a steep challenge.
For years, MF Global aligned buyers and sellers of futures
contracts for commodities like wheat or metals, and took a
small commission along the way. But over the last decade,
that business had become endangered. By the time Mr. Corzine
arrived, near zero-percent interest rates and paper-thin
commissions had led to five consecutive quarters of losses.
Soon after taking the helm, Mr. Corzine oversaw a wave of
job cuts and overhauled compensation, moving from steady
commissions to salary and discretionary bonuses like the rest
of Wall Street.
At the same time, Mr. Corzine filled the ranks with
employees from Goldman Sachs and hedge funds like the Soros
Fund Management. He recruited Bradley Abelow, a fellow
Goldman alumnus and a top aide when he was governor, to be
chief operating officer.
Mr. Corzine arrived just as Washington was pressing the big
banks to curb their lucrative yet risky businesses. Spotting
an opening, he fashioned new trading desks, including one
just for mortgage securities and a separate unit to trade
using the firm's own capital, a business known as proprietary
trading.
Not to be outdone, Mr. Corzine was the most profitable
trader in that team, known as the Principal Strategies Group,
according to a person briefed on the matter. Mr. Corzine
traded oil, Treasury securities and currencies and earned in
excess of $10 million for the firm in 2011, the person said.
Some inside MF Global worried that the expansion of the
profitable trading business in New York came at the expense
of its futures clearing operation, which was centered in
Chicago. To drum up sales, Chicago brokers were pushed to
introduce longtime clients to their counterparts in New York,
a move that raised tensions.
At times, Mr. Corzine seemed unfamiliar with some aspects
of the futures division. In June, speaking at the Sandler
O'Neill Financial Services Conference at the St. Regis Hotel
in Manhattan, Mr. Corzine stumbled. ``Right now, if you
thought about MF Global's retail business, you probably could
only think of--'' he said, then paused to recall the name of
the division at MF Global that catered to individual
investors.
He leaned over to an aide, who told him it was Lind-
Waldock.
``Chief Risk Officer''
[[Page H8965]]
``I consider one of my most important jobs to be chief risk
officer of our firm,'' Mr. Corzine told that conference.
Yet soon after joining MF Global, Mr. Corzine torpedoed an
effort to build a new risk system, a much-needed overhaul,
according to former employees. (A person familiar with Mr.
Corzine's thinking said that he saw the need to upgrade, but
that the system being proposed was ``unduly expensive'' and
was focused in part on things the firm didn't trade.)
While risk at the firm had been sharply increased with the
bet on European sovereign debt, there was a compelling
argument for Mr. Corzine's strategy.
MF Global had obtained loans to buy debt of Italy, Ireland
and other troubled European nations, while simultaneously
pledging the bonds as collateral to support the loans. The
loans would come due when the bonds matured, which would
happen no later than the end of 2012. MF Global, Mr. Corzine
reckoned, would profit on the spread between the interest
paid on the loans and the coupons earned from the bonds.
But the size of the European position was making the firm's
top risk officers, Michael Roseman and Talha Chaudhry,
increasingly uncomfortable by late 2010, according to people
familiar with the situation. They pushed Mr. Corzine to seek
approval from the board if he wanted to expand it.
Mr. Roseman then gave a PowerPoint presentation for board
members, explaining the sovereign debt trade as Mr. Corzine
sat a few feet away. The presentation made clear the risks,
which hinged on the nations not defaulting or the bonds
losing so much value they caused a cash squeeze. The
directors approved the increase. Mr. Roseman eventually left
the firm.
Within MF Global, Mr. Corzine welcomed discussion about his
bet and his reasons for it, though some senior managers said
they feared confronting such a prominent figure. Those who
did challenge him recall making little progress. One senior
trader said that each time he addressed his concerns, the
chief executive would nod with understanding but do nothing.
These concerns were only internal at first because, while
MF Global had disclosed the existence of the transactions in
at least one filing in 2010, it never mentioned the extent to
which they were used to finance the purchase of European
debt.
The firm bought its European sovereign bonds making use of
an arcane transaction known as repurchase-to-maturity. Repo-
to-maturity allowed the company to classify the purchase of
the bonds as a sale, rather than a risky bet subject to the
whims of the market. That called to mind an earlier era of
trading when firms used repo-to-maturity to finance the
purchase of risk-free assets like United States Treasury
securities, Mr. Corzine's specialty at Goldman many years
earlier.
``It's like a bond trader from 15 years ago went to sleep
and suddenly awoke to make these trades,'' one regulator who
later reviewed the transactions remarked to a colleague.
Eventually, MF Global's auditor, PricewaterhouseCoopers,
asked Mr. Corzine to report the European debt exposure to his
investors. He personally met with the accounting firm in
December 2010, two people said, and it was agreed that the
transactions would be mentioned in a footnote in the firm's
annual report, which was filed on May 20, 2011.
Mr. Speaker, I thank you very much for the time this evening, I thank
my colleagues and those who are listening, and I yield back my
remaining time.
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