WASHINGTON - A top U.S. regulator charged former MF Global chief Jon Corzine over the collapse of the futures brokerage, placing the former New Jersey governor firmly at the heart of one of the country's 10 biggest bankruptcies.
The Commodity Futures Trading Commission said on Thursday it will seek to ban Corzine and former Assistant Treasurer Edith O'Brien from the industry in a civil case, and also seek penalties against the two.
"Mr. Corzine is charged with being more than a passive actor in the downfall of MF Global," CFTC enforcement head David Meister said on a call with journalists. "He lacked good faith and ... violated his supervision obligations."
The CFTC also settled with MF Global Inc, which agreed to pay a $100 million penalty and all the funds still owed to customers.
MF Global collapsed in October 2011 under the weight of aggressive bets on sovereign debt, after Corzine -- a former Goldman Sachs co-chief executive and New Jersey governor -- sought to transform the brokerage into a global investment bank.
But investors quickly lost confidence in the company's health when the European economy weakened in the middle of 2011, asking MF Global to put up more money to secure the trades, and causing its remaining cash to rapidly vanish.
Customers were left reeling after it was discovered that about $1.6 billion was missing from their accounts, something that is explicitly banned under futures regulation, and which caused a political fire storm.
In its investigations, the CFTC found that MF Global's company treasurer was describing the liquidity situation as "skating on the edge" and recommended to "take the keys away" from Corzine, which did not happen.
Andrew Levander, a lawyer for Corzine, did not immediately respond to a request for comment. Neither did a Corzine spokesman. O'Brien's lawyer had no immediate comment.
Corzine has often struck a defiant tone when testifying before lawmakers about the debacle, pointing the finger at back-office dealings he had no insight in and denying knowledge of any instructions to misuse customer funds.
O'Brien invoked her constitutional right against self-incriminated and refused to answer questions when called to testify. But the CFTC's complaint places the two firmly at the heart of the $41 billion bankruptcy.
"Our investigation also recovered an audio recording of (O'Brien) saying to a colleague that it could be 'game over' from a regulatory perspective if the customer funds weren't returned," Meister said on the call.
Four years after the end of the financial crisis, there have been few prosecutions, and there is increasing pressure on regulators to bring more of those responsible for the credit collapse to task.
The CFTC said it would continue to press charges against MF Global's holding company.
Louis Freeh, the trustee liquidating MF Global, has said in the past he believes customers would get all their money back when the company in April won court approval to liquidate its assets, and end its $40 billion bankruptcy.
Most customers have already been reimbursed for about 93 percent of the value of their accounts.
Goldman Bonuses Now Dependent on Not Embarrassing the Firm
Civil Charges Filed Against Jon Corzine Over MF Global Collapse
We should start with the transaction mentioned above, which involved a mortgage-related security called Abacus 2007-AC1. This was one of many collateralized debt obligations that Goldman created, sold to investors, and bet against in the years before the crash, making lots of money when the underlying assets lost value. Other banks did basically the same thing, spreading the rot throughout the financial system as institutional investors such as pension funds and insurance companies bought CDOs based on bad debt.
This seems like pretty objectionable behavior, but as we've seen, Blankfein himself professed to find it OK in principle. What's not OK, one imagines, is for a pink-slipped Goldmanite who worked on the Abacus 2007-AC1 deal to write a roman à clef called "How I Caused the Credit Crunch: An Insider's Story of the Financial Meltdown." But that's what Tetsuya Ishikawa did in 2009. I'm not sure, though, how the company can protect against this contingency, since a laid-off employee has no bonus to lose. On the other hand ...
... Fabrice Tourre was still at the firm when he brought Goldman into disrepute. Here again, we are concerned with Abacus CDOs, which M. Tourre worked to present as more attractive investments than objectivity would suggest. He tried to get Moody's Investors Service to rate component assets more highly, and did not disclose to clients that a hedge fund collaborated with Goldman in selecting the bonds that made up the products, before betting against them as well.
Rough stuff, but financial transactions can usually be spun to lawmakers and the public as complicated processes with utilities unclear to the uninitiated. Tourre made the mistake, however, of composing eminently-excerptible emails in which he explained what was going on, albeit with a weird sense of humor. The securities in question were "like a little Frankenstein turning against his own inventor", he wrote, "a 'thing', which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price." Nevertheless, he "managed to sell a few abacus bonds to widow (sic) and orphans that I ran into at the airport". Most revealing of all, Tourre offered the following ironic explanation of why Goldman's double-dealing wasn't so bad:
"Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the U.S. consumer with more efficient ways to leverage and finance himself, so there is a humble, noble and ethical reason for my job ;) amazing how good I am in convincing myself !!!"
Which literally makes a mockery of the standard defense of investment banking's social value.
Moving backward in time a bit, we come to one of the all-time corporate PR blunders, which happened when Goldman opened its headquarters to journalists in the fall of 2009, offering access to Blankfein in an apparent attempt to improve its public image. Talking with a Times of London reporter about capping compensation -- which Blankfein argued against, using "ambition" and "success" as surrogates for "money" -- the CEO grinned impishly and said he was 'just a banker "doing God's work.'" (The impish grin is in the original.) Defenders of Blankfein argued that he was just kidding, not realizing that this cynical jocularity was precisely what made the remark so distasteful. Blankfein's bonus for 2009 was $9 million in stock -- no cash -- "a modest payday by Wall Street standards," according to the Associated Press. "It's almost as if he's taking a bullet for everyone else," observed an awed "compensation consultant."
After the "God's work" debacle, Goldman sought a different means of acquiring good will: buying it, with a $500 million investment in small businesses struggling through the recession. But as The New York Times observed, that sum, announced in mid-November 2009, represented approximately 3 percent of the $16.7 billion earmarked for compensation up to that point. Accompanying this gesture was a vague expression of contrition by Blankfein, who said of his firm, "We participated in things that were clearly wrong and we have reasons to regret and apologize for." What those wrong things were he did not specify, thereby omitting a crucial part of any apology.
When Greg Smith quit Goldman in March 2012 after almost 12 years there, he went out with a bang, calling the place "toxic and destructive" in the pages of The New York Times. But the best revelation in his insider account was the assertion that he had "seen five different managing directors refer to their own clients as 'muppets,' sometimes over internal e-mail." There was also something about "ripping eyeballs out," which seems like a grotesque intensification of "rip-off." So not identifying your clients with absurdist puppets, or fantasizing about blinding them when they make you money, is probably now a prerequisite for a good payday at Goldman. Assuming all this stuff about business standards is real and not a PR ploy.