Tuesday, November 1, 2011

The MF Global Collapse | Trust and Confidence Blown Again (Naked Capitalism)


Were Customer Accounts Pilfered at Jon Corzine’s MF Global? (Updated)

Truth be told, I hadn’t paid much attention to the implosion of MF Global, because so many hedge funds went under during the crisis that yet another levered trading firm death seems less than newsworthy unless it is big enough to constitute a possible systemic event. The collapse of MF Global didn’t seem all that unusual, save for the titilating angle that the firm was headed by former Goldman CEO and New Jersey state governor Jon Corzine (I’d treated the failure of hedge funds by other storied names, such as Jon Meriwether and Myron Scholes as comment-in-passing incidents).
But the picture changes considerably with the report that hundreds of millions of customer assets may be “missing”. If this is true, there are pretty much no savory explanations.
One possibility is the firm raided customer accounts to try to shore up its principal business. That’s a fraudulent use of customer assets, and one would think anyone associated with it (and that would include the managing partner) would be subject to fines and barred from the securities industry for at least a period of time. I’m not certain what level of abuse is considered to be criminal. Informed readers are encouraged to pipe up.
The Times does mention that the missing money may simply be really bad bookkeeping (or more likely, poor internal controls, particularly, sloppy validation of how employees marked trades in illiquid markets, allowing staff to game the system, either to boost their bonuses or to cover up losses they optimistically assumed they’d be able to reverse). But even so, that raises questions about the competence of the firm’s management, and whether past accounting “errors” led to profits being exaggerated.

No comments: