[Congressional Record (Bound Edition), Volume 157 (2011), Part 14]
[House]
[Pages 20091-20094]
[From the U.S. 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.
  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

[[Page 20092]]

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 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

[[Page 20093]]

     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''
       ``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

[[Page 20094]]

     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.

                          ____________________