Federal investigators discovered a $165 million transaction between MF Global accounts last week. The transaction was made — and then unsuccessfully reversed. One hundred sixty-five million dollars is not even Mitt Romney-level spare change. But in the ever-deepening saga of MF Global, it accounts for barely 10 percent of the $1.6 billion missing from the firm's accounts.
Welcome to the living nightmare that is MF Global. The financial derivatives brokerage filed for corporate bankruptcy on Halloween of last year, after reporting a shortfall in its customers' accounts of nearly $900 million. Four months later, federal investigators are still trying to recover more than a billion dollars in funds. Many have begun to fear that most of the money has simply vanished into thin air, never to be seen again.
MF Global is an extremely rare case in the history of corporate bankruptcies and missing account funds. When Texas energy giant Enron collapsed in December 2001, it took financial journalists and accounting experts months to discover that the firm had been falsifying profits for several months. A London-based UBS trader had managed to lose $2 billion after a series of bad trades, but that loss had not affected customers' accounts.
But MF Global didn't show any signs of failure. There were no outrageous profits or rogue traders, no history of risky investments or even a major market collapse to create a sudden need for capital. Rather than a snowball of unfortunate events, MF Global seemed to spontaneously combust in less than a week.
Operations at MF Global quickly ground to a halt after the company reported a quarterly loss of over $190 million on Oct. 25. After failing to find a buyer under such short notice, the two-hundred-year-old institution filed for Chapter 11 six days later.
Since the firm's whirlwind collapse, the circumstances have become clearer. The huge loss was due to a bad bet on foreign sovereign debt. When the bonds tanked, MF moved $700 million from its customers' accounts to its own trading account to cover its losses.
CEO and former New Jersey Governor Jon Corzine drew much criticism in the weeks following. Corzine is the equivalent of a Wall Street journeyman. After an illustrious career at Goldman Sachs that included a five-year run as CEO, Corzine tried his hand at politics. When Corzine returned to finance in March of 2010, many saw it as his last hurrah. Rather than sit back and run a hedge fund on his reputation, he felt the need to make one last big bet.
Former chief risk officer Michael Roseman testified before Congress earlier this year, he made a point to say that Corzine had spearheaded the Euro-debt bets. Even when Roseman - and later Michael Stockman, who replaced Roseman in January of 2011 - warned him of the implications such risky bets could have, Corzine apparently brushed off his concerns.
I have tried to work MF into my day-to-day vocabulary, and it is surprisingly applicable in many situations. For instance, whenever one of my friends is about to invest several billion dollars in risky sovereign debt — an all too common occurrence among Tufts students — I'll be straight with them: "That's MF'd up, yo."
Jokes aside, the most distressing part of the MF Global saga is that the collapse does not only impact the firm's shareholders. Many of MF Global's account holders are farmers looking to lock in prices for future crops. At a time when the market as a whole has been making steady progress, the collapse of MF Global continues to shock the financial sector. But perhaps it will serve as an example: A rogue trader can hurt profits, but a CEO can break a company.
This article has been modified from its original version to reflect the role of Michael Roseman during MF Global's final days. He was the former chief risk officer of MF Global until January 2011.
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Walt Laws-MacDonald is a freshman who has not yet declared a major. He can be reached at Walt.Laws_MacDonald@tufts.edu.
