Insider: Did Corzine’s connections win now-failed MF Global too much leeway from regulators? (Getty)
By playing the fool in two high-profile hearings, Jon Corzine so far has been able to deftly sidestep lawmakers’ questions about the now-infamous implosion of MF Global, including the disappearance of a whopping $1.2 billion in customer money that should have been kept safe in brokerage accounts. But new questions are about to arise.
Specifically: How did Corzine manage to convince regulators that a relatively small brokerage like MF Global was ready for big-time status, both as a risk-taking hedge fund and (even more startling) as a primary dealer of US government debt — a status that only a very few firms are allowed?
The likely explanation involves Corzine’s long experience at the nexus of politics and finance — as CEO of Goldman Sachs, then US senator and New Jersey governor, and of course as a leading Obama fund-raiser. In other words, crony capitalism.
Corzine is to appear before the House Financial Services Committee’s Subcommittee on Oversight and Investigations tomorrow, and informed sources tell me the panel is keenly interested in how Corzine (who’d been out of the brokerage business for over a decade) managed to take this firm from nothing to something almost overnight — that is, before its spectacular demise last month.
Keep in mind that being a primary dealer — with the rare privilege to underwrite US government debt sold at auction and then resell those bonds to investors — is no small-fry position. The coveted assignment is usually reserved for the biggest firms that are also considered the market’s safest bets.
The New York Fed selects the best and most financially solid firms for this task for obvious reasons: When markets become volatile, it wants to make sure the firm buying government bonds can withstand the volatility. In other words, the government wants to make sure its primary dealers can take a punch and won’t implode at the slightest turn of the markets.
Yet MF Global was anything but one of the market’s soundest outfits. Not only did a simple disclosure of its of its European debt exposure cause a severe cash-crunch, but the very fact that it lost more than $1 billion in customer funds during its final hours shows that (at minimum) MF Global lacked basic and routine controls.
So how did all of this manage to evade regulators, despite all the new rules promulgated in the aftermath of the 2008 financial crisis?
Well, William Dudley, who runs the New York Fed (which, again, selected MF Global as a primary dealer), is just one of Corzine’s old Goldman cronies to be found in the MF Global mess.
That the two worked together at Goldman doesn’t necessarily mean Corzine got a break from an old colleague. In fact, Corzine has said that he “never spoke” with Dudley about the primary dealer matter, at least to the “best of my recollection.”
But committee members are skeptical, not just about Corzine’s “best recollection,” but also because, according to a person close to the subcommittee, “MF Global tried to get primary-dealer status prior to Corzine . . . and once Corzine became CEO, MF Global got primary-dealer status.”
That status gave MF Global greatly added legitimacy, bringing in clients and letting CEO Corzine transform it into a risk-taking trading shop — without, it seems, the most rudimentary controls to protect customer cash.
Whose job was it to make sure those controls were in place? Certainly at the top of the list is the Commodity Futures Trading Commission, run by yet another Goldman alum, Gary Gensler.
The implosion of MF Global and the disappearance of customer cash may well turn out to involve massive fraud and deception. But the firm’s expansion to that point may involve something equally sinister but completely legal: The ability to work the system, which seems to be Corzine’s greatest feat.
Charles Gasparino is a Fox Business Network senior correspondent.