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Last updated: November 15, 2012 7:05 pm
MF Global misled regulators over the size of its eurozone bond bets, a powerful US congressional committee has claimed in a scathing report into the broker’s collapse under former chief executive Jon Corzine.
MF Global declared bankruptcy last year after making billions of dollars worth of complex bets – known as “repo to maturity” trades – on European government debt. The broker’s failure left $1.6bn worth of customer funds missing and provoked congressional outrage as well as numerous lawsuits and regulatory investigations.
“When MF Global first entered European repo-to-maturity trades in September 2010, the company neither acknowledged the exposure it had to troubled eurozone debt when questioned by its regulators, nor did it clearly describe the size and nature of its portfolio to the public in the company’s regulatory filings,” the House financial services committee’s investigations panel said in the report.
The 101-page report has been a year in the making. Alongside a post mortem published by James Giddens, one of MF Global’s bankruptcy trustees, it is the most detailed account yet of the futures broker’s high-profile collapse.
It also makes a number of recommendations – including that Congress explore whether the US Securities and Exchange Commission be merged with the Commodity Futures Trading Commission in the wake of MF Global’s collapse.
According to the House report, the Financial Industry Regulatory Authority contacted MF Global, along with other brokers, in September 2010 in an effort to gauge their exposure to the troubled eurozone. MF Global said it did not have any European government bonds, even though it already had, under the direction of Mr Corzine, made at least $1.5bn worth of convoluted repo to maturity trades.
It was only when Finra contacted an MF Global subsidiary to ask about a loss incurred in the spring of 2011 that the regulator learnt of the company’s European debt exposure, the report said.
Finra then determined that the trades required MF Global to take capital charges on the positions based on the SEC’s “net capital rule”. MF Global allegedly complained about Finra’s decision to the commission.
SEC staff members “were surprised to learn that MF Global had not taken haircuts on its European bonds and found the company’s representatives to be unfamiliar with published SEC guidance interpreting the net capital rule”, the report said.
MF Global eventually took an extra $183m capital charge on its eurozone exposure, but not before making an unsuccessful argument to regulators that its Belgian, Italian and Spanish bonds should be treated like US Treasuries for capital purposes, the report said.
The additional capital charges, along with continued margin calls on the broker’s debt trades, helped spark the company’s descent into bankruptcy.
The report, a summary of which was published on Wednesday, blamed Mr Corzine for attempting to transform the company from a modest brokerage to a full-service investment bank with a heavy focus on risky proprietary trading.
The committee said that Mr Corzine and former chief financial officer Henri Steenkamp were not “forthright” about the company’s liquidity difficulties in the months before the broker’s collapse. It also criticised rating agencies Moody’s and Standard & Poor’s for failing to “sufficiently review MF Global’s public filings to identify risks when they did emerge”.
Steven Goldberg, spokesman for Mr Corzine, said on Wednesday in response to the report’s summary that Mr Corzine “disagrees strongly with several of the assertions” in the panel’s report. “At all times Mr Corzine acted in good faith and did what he believed was necessary to turn around MF Global,” said Mr Goldberg.
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