It’s starting to play out more like an episode of Scooby Doo: “I would have forged the numbers on this balance sheet and gotten away with it if it weren’t for you meddling kids.” In October 2011, the New York brokerage firm MF Global filed the eighth largest bankruptcy in US history. CEO John Corzine, former executive of Goldman Sachs and heavily bearded resident of the New Jersey governor’s mansion, came under investigation upon discovery that $1.2 billion in customer investments were missing. As this quagmire develops, it has illuminated many key current financial themes, from regulation to the dangers of complex global transactions and even the European debt crisis.
The Case of the Disappearing Assets and the Company That Ceased-To-Be
To best jump into the MF Global case, it helps to understand its business practice. MF Global made money by trading futures and derivatives, investments whose value is based on an underlying asset, in this case, a foreign currency. Furthermore, like most brokerage firms, MF Global was heavily leveraged, meaning it was so sure of its investments, it borrowed extra money in order to make more bets and generate greater profits. Using this flawless business plan, MF Global purchased huge amounts of debt (bonds) from Portugal, Italy and Spain, the “PIIGS” countries that created the European debt crisis, since these riskier countries’ bonds produced greater returns. But because those bonds fell in value, things went south pretty quickly for MF Global….
The Case of the “Missing” Money
Hemorrhaging money after its poor trading decisions, MF Global filed for bankruptcy on October 25, 2011 after reporting a $191.6 million quarterly loss while its credit rating was cut to “junk” level (“I’m good for it, just give me a few more weeks”). When the federal investigation began though, it became clear that the real problem was the improper mingling of customer funds with its own for those trades. While a brokerage firm is allowed to maintain its own account for trading, it cannot mix its own money with that of customers’. Just like you can’t steal in school or a store or on the street, you can’t in finance either (“There are rules, this isn’t ‘Nam”)
The Case of the “Partially Reappeared – No, Wait, Nevermind, False Alarm” Money
The most notable breakthrough in the search for the missing funds occurred in late November when $200 million of customer money was discovered at JPMorgan in London, clearly in Diagon Alley. It was found overseas because JPMorgan’s fish-’n'-chips branches served as a middleman between MF Global and the partners who it traded currencies with. It appears that in MF Global’s final hours, as the firm lost money on its currency and bond trades, it overdrew its account at JPMorgan and then replaced the money it owed with those customer funds. Subtle.
The Case of the Never-Ending Stack of Paperwork
So what’s taking so long now? You can’t blame Shaggy, the gang’s bell-bottoms or Scooby’s sleuth inadequacies. Unfortunately, the hunt for the lost funds is prolonged simply because of MF Global’s poor recordkeeping. For now, the case will breakdown into three acts. On the one-hand, Congressional hearings will aim find whether Corzine or others are responsible. Second, due to the massive amount of money involved, the FBI will determine if there is a criminal element. And third, a “forensic” team of regulators will attack the mountains of accounting papers until, we presume, the year 2047, because they detail every trade made.