Comparing MF Global to Watergate

The adjective competent is seldom applied to the Securities and Exchange Commission. Probably the public perception of the SEC is that it is a great place to work, a pleasant place, where lawyers can download and view porn while Wall Street and Washington anguish over financial meltdowns and collapsing credit markets, an institution that sustained a benign view of Bernie Madoff for 12 years, almost until his arrest, where a shoulder shrugs suffices as an explanation of the flash crash. Alas, the SEC may be about to judged worse than incompetent it may be corrupt.

Under law MF Global was compelled to file an Annual Audited Report on Form X-17-A-5 with the SEC. In the normal course of events this document is scanned by the SEC and uploaded to its site where the public can view it. This is usually done in two to four weeks from receipt of the document. In the case of MF Global the time stamp shows it was received on September 2, 2012. In fact MF Global filed the report in May. When the report was released astute investors began to run from MF Global as if it were radioactive.

A clerical error? If it was it was a $300 million dollar clerical error? From the time the report was filed in May until it was posted in September several things happened. Let me set the time line.

1. The SEC acknowledged receiving the report on May 31.


2. On August 2 MF Global sold $300 million worth of worthless bonds.


3. When the report was released in September it revealed Global's exposure to European sovereign debt and investors began to leave the firm. This eventually culminated in a run on MF Global.


4. On December 14, 2011 the SEC removed the report from its web site.


5. On January 3, 2012 the document reappeared with a different time stamp.

It's understandable that the popular media would describe the MF Global bankruptcy as "complicated" and move on. Even with the best of motives that segment of the media is only able to deal with uncomplicated events such as shootings, rapes, and rowdy Tea Party members at town halls but the financial press is not so encumbered. In the financial press there are no angels and certainly Jon Corzine is not portrayed as a kindly civil servant caught up in the snares of greedy capitalists. This is not Corzine's first ethical lapse. As CEO of Goldman Sachs he pioneered the bundling of toxic and non-transparent mortgage debt instruments to professional investors. When the chairwoman of Commodity Futures Trading Commission (CFTC), Brooksley Born tried to bring transparency to these debt instruments she lost her job. That was during the Clinton years. An Obama administration probably would have jailed her.

Corzine used confidential information from the New York Federal Reserve Bank, Timothy Geithner's former employer, to view Long Term Capital Management's market position and then played the opposite side of the trade. He lied to both LTCM and to the Fed for his personal gain. Richard Lowenstein of the New York Times wrote about Corzine’s Goldman Sachs, “Brazenly playing both sides of the street [Corzine's ] Goldman represented investment banking at its ugliest.”

The document tampering raises some pointed questions about the cozy relationship between Jon Corzine and the SEC but after a one day appearance before the Senate, former Senator Corzine is looking for Wall Street office space while his customers, whose money he stole, languish in bankruptcy court and Eric Holder sits on his hands.

Not everyone in commodity futures is wealthy. Farmers and rancher use commodity futures to lock in the price of their beef or wheat by purchasing or selling future contacts to deliver that product. Being street savvy, Corzine knew who he could screw and who he couldn't. The big players with plenty money for lawyers and political clout seemed to have been taken care of as MF Global sunk into insolvency. There is speculation that the accounts of less affluent customers were raided for the purpose of paying off the heavy hitters. They face a long hard fight. The Sentinel Management Group has been in bankruptcy court since 2007 and its customers have yet to be compensated.

Now enters the surprising character, Louis Freeh, the former Federal Bureau of Investigation director who was appointed bankruptcy trustee of MF Global. Freeh is probably just whoring his reputation for competence and integrity, the memories of Ruby Ridge and the Waco siege no longer fresh in the public mind. He was brought into Penn State's own investigation of the recent Sandusky sex scandal to convey seriousness, integrity, and competence. Now Freeh is impeding investigators with some notion of lawyer client privilege. While Freeh's role has gone unnoticed in most of the press one can expect he will draw attention when this case makes it back to the front page.

In the video below Mark Melin of Opalesque Futures Strategies likens the MF Global bankruptcy to Watergate. Whether he is proven correct or not keep in mind that if you think people should be sitting in jail right now your opinion is shared by many Wall Street insiders and a few good journalists. Evidently getting tired of hearing his rancher constituents complain Senator Max Baucus has requested an investigation in a letter to CFTC Inspector General Roy Lavik. The CFTC? WTF? This is not some regulatory snafu. This is felony fraud. One hopes that by November the public will realize that no brokerage account, no bank account, no IRA or 401K is safe in this atmosphere of lawlessness that is the Obama administration.