Case 3‘Take Customer Cash to Survive?’ Compliance and Chaos at MF Global

The trades are safe. Europe will pay its debts. – Jon Corzine “Imagine you had your life savings in your bank account, your bank committed fraud, and as a result you could not touch your money” – former MF Global customer

THE ROOF WAS STARTING TO CAVE IN. It felt like that to Edith O’Brien, Assistant Treasurer of MF Global International (MFGI). It was October 28, 2011. MFGI and its holding company had just been downgraded to “junk status” by all three rating agencies, Moody’s, S&P and Fitch. The downgrades and other adverse events had set off a liquidity crisis. MFGI was being hit by a cascade of margin calls on positions it had taken in risky European Sovereign Debt. J.P. Morgan, MFGI’s “clearing bank,” had just advised it was cancelling all intraday credit lines. MF Global UK (MF UK) had overdrawn several of these lines, prompting the move.1 Now, a new crisis was at hand. O’Brien looked at a set of wire instructions sitting on her desk. The first wire would transfer $200M from segregated customer accounts at MFGI to MF UK. The second would fund an MF UK account at J.P. Morgan, remedying the Morgan bank overdrafts. These wires had been composed in response to a message received by MFGI CEO Jon Corzine that the J.P. Morgan overdraft situation was “HOLDING UP VITAL BUSINESS IN THE U.S. AS A RESULT.” Corzine had then contacted O’Brien’s office and asked them to resolve the Morgan overdraft problem urgently. ...

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