The New Robber Barons Page 31
Richard Teitelbaum quoted me: "What is this but crony capitalism? Most people have had their fill of it."
Meanwhile, then Secretary Paulson told the public a different story than he told the meeting attendees. According to Bloomberg's research, earlier that day, Paulson told the New York Times that the Federal Reserve and the Office of the Comptroller of the Currency were inspecting Fannie and Freddie's books and he expected the result of this would inspire confidence. The Times's article appeared the following day. Any investor in the shares of Fannie and Freddie would be less likely to sell their shares in the face of this reassuring message.
There is no way of knowing [without an investigation into non-public trading records] whether the hedge fund managers initiated new trades as a result of this meeting, but the key issue is that then Secretary of the Treasury Paulson communicated non-public material information that could financially benefit the recipients at the public's expense.
Apparent Damage Control: That's How They Roll
On Wednesday, Nov. 30, 2011, I got a call from a staffer for Congressman Michael Quigley (D., IL.). Congressman Quigley represents Illinois's 5th district. He replaced Rahm Emanuel, the current mayor of Chicago, in a special election after Rahm resigned to become White House Chief of Staff. (Note added 12/4: Rahm Emanuel was on Freddie Mac's Board in 2000 and 2001, a period during which its regulator said the board "failed in its duty to follow up on matters brought to its attention.") Rod Blagojevich preceded Rahm Emanuel. Blagojevich was elected governor in 2002 and was subsequently impeached for corruption and misconduct and convicted of one count of lying to the FBI. He awaits sentencing.
Congressman Quigley's staffer called because he saw my quote in the Bloomberg article. He claimed he was looking for clarification of my position, and I stated the article accurately reflected my viewpoint. But the staffer seemed to me to defend the meeting.
The staffer said this kind of meeting "happens all the time." I retorted, "Really? What's the excuse?"
He then claimed he was just trying to play "devil's advocate." But don't we have a surplus of those?
The staffer claimed that people want to discuss regulations with people who might be affected. I responded that this excuse is ludicrous. Then Secretary of the Treasury Paulson discussed material non-public information about the restructuring of Fannie Mae and Freddie Mac with people who were in a position to profit at the expense of the public. I cut the phone call short at that point.
I would like to give my local politician the benefit of the doubt that a staffer wasn't acting as an errand boy trying to send a message, but that phone call didn't give me much to work with. It seems that whether it's Henry Paulson working for a Republican administration or a Democratic errand boy doing apparent damage control, it looks as if we're steeped in bi-partisan sleaze. If the staffer was merely playing the fool, then U.S. citizens needn't suffer them gladly. [Note added December 6, 2011. Please see clarification below. Mr. Quigley clarified that we share mutual position.]
Breach of Then Treasury Secretary Paulson's Duty as a Public Steward
This is from the Department of Treasury's website: "Treasury's mission highlights its role as the steward of U.S. economic and financial systems, and as an influential participant in the world economy."
It seems to me that the secretary of the treasury is a civil servant and a public steward. When then Secretary Paulson offered material non-public information to hedge fund managers that could profit by trading shares (initiating new shorts) of Fannie Mae and Freddie Mac while telling the public a different story, he breached those duties.
Public service is just a social contract, and as one fund manager observed, "So are the Ten Commandments."
What do we, as Americans, stand for and how much of this can we stand? What are we willing to tolerate or not tolerate from our public servants? Where did we go so wrong that congressional staffers -- most probably errand boys -- imply that crony capitalism is business as usual?
In case our politicians or their staffers may have any remaining questions, let me be clear.
The above meeting is an example of crony capitalism, and it is wrong.
Note added December 6, 2011. The following is an excerpt from Mr. Quigley's (U.S. Representative for Illinois' 5th District) post, "Paulson's Actions Raise Serious Ethical Questions"
"I share the outrage of concerned citizens like Richard Teitelbaum, Janet Tavakoli, and Professor William Black of the University of Missouri - Kansas City. During a time of budget-busting bailouts and skyrocketing debt, it is wholly inappropriate and wrong that an elite group of insiders would be able to profit by their personal connections to Washington policymakers. Last week, my staff spoke to Ms. Tavakoli and others to ascertain the scope of Secretary Paulson's potential wrongdoing, and subsequently sent a letter requesting an oversight hearing on this matter to Chairman Patrick McHenry of the Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs, of which I am the ranking member. Unfortunately, I believe Ms. Tavakoli misunderstood the reason for our call and hope that this post clarifies our mutual position."
Corzine Dodges the Fraud Question
December 9, 2011
It's as if Jon Corzine's PR machine is in top spin mode. You'll recall Jon Corzine is the former head of Goldman Sachs and former CEO of MF Global that appeared in front of Congress yesterday to answer questions about an estimated $600 million to $1.2 billion in missing money from the segregated accounts of customers of MF Global.
Yesterday and today, I heard confusion about whether or not MF Global's diverting customer funds was allowable and the possibility that customers will eventually get the money back.
Let me be clear. The diverting of customer funds from segregated accounts is not legal or allowable, and even if the money is later "found" it is fraud.
Jon Corzine was a bond trader in his past life and he says he doesn't know where the money is and that he didn't understand the details of the operations of MF Global, which appear to be a mess due to negligence or intent.
Corzine Knew or Should Have Known About an Alleged Federal Crime
Corzine may truthfully say he doesn't know exactly where the money is at the moment, but as head of MF Global and as the proponent of risky leveraged sovereign bond trades, he knew or should have known that MF Global didn't have enough cash (or collateral) to support those trades.
Instead of unwinding the trades, it appears that MF Global illegally wired money from customer accounts to satisfy margin calls on MF Global's trades. If that illegal activity happened, Corzine as a bond trader aware of risk and as the head of MF Global, knew it or should have known it. This should be the focus of Congress' investigation. Wire fraud is a federal crime.
"Finding" Money Doesn't Excuse Fraud
Let me address the implication of the potential to "find" the money. The money may indeed be "found." If the bonds mature and pay off one hundred cents on the dollar, it may be possible to claw back money from MF Global's trading partners without much of a fight. Otherwise there may be a legal battle for money that as creditors of MF Global, they were never entitled to in the first place.
The rights of MF Global's customers are superior to the claims of these creditors. But eventually replacing the filched funds is not the same as restitution, since reputations and businesses have already been ruined. Damage has also been done to the trust in the global futures market and Futures Commission Merchants (FCMS).
Never Allowable to Filch Customers' Funds
The key issue is that it is never allowable to divert money from customers' segregated accounts. CFTC Commissioner Jill E. Sommers did a good job of stating that in her testimony yesterday. Moreover, if any trades mimicking Corzine's were done on behalf of the tiny minority of customer accounts that could engage in this trade, the trades would have to be segregated and credits or losses would show up in the relevant customers' accounts.
That still doesn't explain the missing funds in most cus
tomer accounts. Most customer accounts would not even be eligible for the "Corzine sovereign bond trade." Why is that? Here's an excerpt from Sommers' testimony: "Under Section 4d of the CEA, customer segregated funds may be invested in: general obligations of a sovereign nation (to the extent the FCM holds customer funds denominated in that sovereign nation's currency)." Most MF Global customers now missing money did not hold foreign currency accounts.
Pushing the idea that this trade was "allowable" for some customer is a distraction trick to avoid the question of whether MF Global impermissibly wired money from customers' accounts to satisfy margin calls for its own trades. Wire fraud is a federal crime.
At Issue is Massive Fraud
The issue under investigation is what appears to be a bold and massive fraud, and Jon Corzine offered no alternative explanation, in fact it seems he cannot explain anything about the firm he ran to anyone's satisfaction.
Jon Corzine may not know where the money is right now, but as head of MF Global, he knew or should have known his trades needed collateral and that customers' money went missing to satisfy part of that need. If it is proved that fraud occurred -- and money missing this long is a very suspicious sign -- it's not plausible to me that Jon Corzine was unaware it was happening at MF Global.
It seems Jon Corzine would have Congress believe he's hopelessly incompetent, because it is better to have them believe that than the business for which he was responsible was breathtakingly wrong.
See also:
Corzine Testifies in MF Global Investigation, C-Span, December 8, 2011.
Note: Prior to becoming the CEO of MF Global, Jon Corzine was the 54th Governor of New Jersey, a U.S. Senator from New Jersey, and the CEO of Goldman Sachs.
Rehypothecation Is An Old Story: MF Global’s Story Is a Different Story of Filched Funds
December 16, 2011
Yesterday Congress held another hearing on MF Global. One representative seemed to suggest that MF Global's movement of money to the UK may have somehow been allowable under Rule 1.25. It was as if a Member of Congress had become Corzine's PR flack, an apologist for Corzine, and was trying to create a false excuse for Corzine. Jon Corzine has been a big Congressional fundraiser and bundler, and it is interesting to see how cheaply some Members of Congress can be bought.
Rule 1.25 wouldn't allow investment in foreign sovereign debt for U.S. dollar accounts, and even if it did, the accounts' assets must be segregated. Rule 1.25 does not allow anyone to filch funds from customers' accounts.
Accounts at MF Global are missing money and have no corresponding asset entries. There is a shortfall of an estimated $600 million to $1.2 billion.
Congress keeps asking how we can prevent this in the future, and I have an answer for them. Run firms with honest people that can reasonably explain the workings of their business to other honest and reasonable men. Reasonable explanations took a holiday from the Congressional hearings.
CFTC Commissioner Jill Sommers did a good job of explaining MF Global's problem in earlier testimony. The cases in which investment in foreign sovereign debt for customers' own accounts are limited to the extent of their foreign exchange deposits (so a small minority of accounts), and it is never allowable to transfer money out of the customer accounts to commingle with MF's investments.
Lies, Cover-ups, and Rubber Checks While Corzine Headed MF Global
The behavior of some Members of Congress is disgraceful because so many honest people were cheated. Here's just one example. While Jon Corzine still headed MF Global, customers requested wire transfers of their money, but MF Global stalled, rubber checks were written and sent to customers, and the checks bounced.
Yet on November 1 while Corzine still headed the firm, Kenneth Ziman, a lawyer for MF Global, relayed information from MF Global to U.S. Bankruptcy judge Martin Glenn in Manhattan: "To the best knowledge of management, there is no shortfall." That wasn't the truth.
"According to a U.S. official, MF Global admitted to federal regulators early Monday [October 31, 2011] that money was missing from customer accounts. MF Global acknowledged a shortfall in a phone call amid mounting questions from regulators as they went through the firm's books." ("MF Global's Collapse Draws FBI Interest," by Devlin Barrett, Scott Patterson, and Mike Spector, WSJ, November 2, 2011.)
We bailed out large failed financial institutions with invisible support amounting trillions of taxpayer dollars and visible support amounting to billions of taxpayer dollars. Hardworking farmers and others that had accounts with MF Global have been left to twist in the wind. Innocent reputations and businesses have been damaged due to MF Global's shortfall.
Filched Funds
We already know for a fact that many US dollar accounts were not intact. Money was missing and there were no asset entries as was required. There's not enough perfume to make this pig smell good. At issue is MF Global's use of segregated customer funds and commingling of segregated customer assets to cover its own shortfall.
Another Potential Crime: Did MF Global Misrepresent Source of Funds to the Fed?
Why did the Fed award prestigious primary dealer status to shaky MF Global, an entity it doesn't regulate and for which it doesn't provide surveillance? Did MF Global subsequently make misrepresentations to the Fed?
MF Global's financials and risk management procedures were shaky ever since Man Group spun it off in 2005 and saddled it with a lot of debt. In fact, in August of 2011, MF Global settled a lawsuit for misrepresentation of the quality of its risk management procedures. Yet MF Global was added to the Fed's list of 22 primary dealers in February 2011, less than one year after former Goldman CEO Jon Corzine came on board. Primary dealers buy and sell U.S. treasuries at auction and are a counterparty to the Fed's Open Market operations.
William C. Dudley is the president and chief executive officer of the FRBNY. He is also vice chairman of the Federal Open Market Committee (FOMC) and VP of the Markets Group, which oversees open market and foreign exchange trading operations and provisions of account services to foreign central banks and manages the System Open Market Account. Dudley is a former partner at Goldman Sachs (1986-2007), and he was Goldman's chief economist.
The biggest benefit to primary dealers is the perception that they are protected by a Fed safety net. This belief is based on precedence, since the Fed has already provided funding to primary dealers during a systemic liquidity crunch. Just before Bear Stearns imploded, the Fed changed the rules so that non-U.S. banks, along with brokers that were primary dealers (as MF Global was), were allowed to borrow through a program called a Term Securities Lending Facility (TSLF) to finance mortgage backed securities, asset backed securities, and more. TSLF's start date was too late to help Bear Stearns, and the program has now been discontinued, but the precedence has been set.
As MF Global's financial condition deteriorated in September and October, MF Global was required to increase its reserves to cover potential Fed losses if MF Global went under, as it eventually did. In Congressional testimony yesterday, New York Fed General counsel Thomas Baxter testified that MF Global said that money posted to the Fed did not come from customers' accounts, and MF Global gave those representations to the Fed in writing. Baxter testified: "If that representation turns out to be false, a federal criminal offense has been committed."
This will be up to investigators to determine, however, since there is no public evidence. Nonetheless, it raises disturbing questions as to why the Fed awarded primary dealer status to an operation like MF Global in the first place.
CME Head Terry Duffy: Under Corzine, Inaccurate Report Kept Regulators in the Dark
Throughout the Congressional hearings, Jon Corzine kept testifying as to how he had no explanation or even expert opinions on what happened at MF Global. He often referred to the fact that he's no longer with MF Global or that events happened after he left. Terry Duffy testified to events that happened under Jon Corzine's leadership:
CFTC and CME staff and auditors returned to the firm
on Sunday, Oct. 30, and were informed by this discrepancy was caused by "an accounting error." Our auditors, working with the CFTC, devoted the rest of the day and night, to find the so-called "accounting error." No such error was found.
Instead, at about 2 a.m. Monday morning, Oct. 31, MF Global informed both the CFTC and CME that the shortfall was real and that customer segregated funds had been transferred out of segregation to the firm's broker dealer accounts.
After receiving this information, CME remained at MF Global while (the firm) attempted to identify funds that could be transferred into segregation to reduce or eliminate the discrepancy.
A CME auditor also participated in a phone call with senior MF Global employees, wherein one employee indicated that Mr. Corzine knew about the loans made from the segregated accounts."
[On Monday, October 31] MF Global revised its segregation report for Thursday, Oct. 27, indicating that the alleged $200 million in excess segregated funds should have been reported as a deficiency of $200 million. This shortfall on segregation on Thursday, Oct. 27, was hidden by the inaccurate report, a telling sign to keep regulators in the dark.