The Astonishing Lack of Progress at MF Global


"As time has unnecessarily passed, the carnage has only become greater. Exchange volumes have plummeted, trader & customer boycotts of the exchanges and industry are growing, industry confidence has been shot, and affected businesses are shutting down."
-- Don Miller, former MF Global (OTC: MFGLQ) customer

On Jan. 10, the e-book version of The Motley Fool's report on MF Global hit the digital shelves at In that report, we were hoping to provide a background for readers who wanted to get up to speed on the wild and head-scratching circumstances surrounding the eighth-largest bankruptcy in U.S. history. It was fully our expectation that much would have changed by the time 2011 had evaporated into 2012.

Sadly, there has been a surprising lack of significant changes over the past month.

Magic money?
The most glaring issue that's yet to be resolved is where the some-$1.2 billion of supposed-to-be-segregated MF Global customer money went.

As a refresher: Shortly before MF Global declared bankruptcy, the company revealed that a significant amount of client money had gone missing. The funds in question were subject to stringent U.S. Commodity Futures Trading Commission rules that require the money to be set aside and not be touched by the company unless it's replaced with certain types of safe assets. In this case, it appears that somebody within MF Global pulled a Steve Miller and took the money without properly putting assets in its place.

Amazingly, we're now two-and-a-half months out from the broker's bankruptcy and there's still nothing but befuddled looks when it comes to the subject of where the money went.

One Goliath that's come under particular scrutiny on this issue is banking hulk JPMorgan Chase (NYS: JPM) . In the waning days of the solvent MF Global, JPMorgan received a $200 million transfer from MF Global that now appears to have been customer funds. JPMorgan contends that it received assurance from MF Global that the transfer was proper, while MF Global...

Well, we don't quite know what the heck was going on at MF Global.

Former CEO Jon Corzine claims that he had back-office approval regarding the transfer, but the woman who supposedly gave him that approval -- a company treasurer named Edith O'Brien -- may have another version of the story. Unfortunately, we don't yet know what that version is, since O'Brien has so far declined to talk with authorities without protection from prosecution.

Of course, that $200 million is only a piece of the missing money, and it's also only one aspect of JPMorgan's involvement in the mess. With the bank playing a wide variety of roles in the pre- and post-meltdown, there's plenty of reason for those involved to look askance at it -- and, in fact, Commodity Customer Coalition head James Koutoulas has called for a boycott of JPMorgan.

Change... is it a-comin'?
But much of the problem boils down to this: Rules were in place to protect customers from failures like this, but they weren't followed. My colleagues and I spoke to a variety of former MF Global customers -- and non-MF Global commodity traders -- and I don't think I'd have to go back to poll them on what they think of the rules at this point. I'm sure most, if not all, would resoundingly say the rules have failed.

To be fair, the trustee that's working to unravel MF Global's broker division has put forth a solid effort and has managed to return 72% of customer money at this point. But 72% is cold comfort to tens of thousands of customers who believed that segregated meant, well, segregated.

A group of key industry members including the National Futures Association, CME Group (NYS: CME) , IntercontinentalExchange (NYS: ICE) , and the Kansas City Board of Trade has announced it will convene to review MF Global's collapse and determine how a similar collapse could be better handled in the future. At the same time, Senate Agriculture Committee chairwoman Debbie Stabenow has been soliciting feedback on regulatory changes from many stakeholders in the industry -- including Koutoulas' Commodity Customer Coalition.

What is very clear is that there is a lot at stake here. If confidence in the system is shaken, that could have an impact on the way companies handle commodity hedging, which is a big slice of the financial markets. It would also hurt exchanges like CME Group and IntercontinentalExchange, where commodities traders go to make their trades. According to November data from the CFTC, total customer segregated funds at futures commission merchants fell $2 billion, or 1.3%, from December 2010. That reversed a trend of year-over-year growth of 7.6% and 13.6%, respectively, in September and June of 2011.

With so many unanswered questions still preventing resolution of the case, proposing changes may be somewhat difficult at the moment. But for those with a stake in seeing the commodity futures markets operate smoothly, there's a clear need to show that they're keen on making sure that another debacle like this doesn't happen again.

But why should you care, anyway?
For many Fool readers, the issues surrounding the MF Global collapse may seem a million miles away. Frequenters of The Fool are far more likely to be interested in stocks than commodity futures, and so the plight of MF Global futures customers may not seem particularly concerning.

That couldn't be farther from the truth. Commodities -- which represent everything from oil and corn to copper and milk -- have a far-reaching impact on our economy, and commodity producers' and users' ability to effectively hedge their exposure to commodity prices has important implications for the entire economy.

But at a much more basic level, at issue here is simply what's right. The money that customers kept at MF Global was not a collection of loans to MF Global. It was certainly not money that was invested in MF Global. It was simply money that was held -- as a bank holds your deposits or your broker holds your stocks and investment cash -- at MF Global so that its customers could invest and conduct business.

Considering the rules that were in place to protect those funds, it's insane that closing in on three months from the date of MF Global's bankruptcy, customers are still grasping at air when it comes to more than a quarter of their money. As I said earlier, there's been a surprising lack of change in circumstances surrounding MF Global over the past month. I only hope that a month from now I can't say the same thing.

If you'd like to get up to speed on the circumstances around MF Global and its collapse, be sure to check out The Motley Fool's e-book on the subject. At $0.99, it's one of the best bargains you'll find on

At the time thisarticle was published The Motley Fool owns shares of and JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook.

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