Jon Corzine Reportedly Used Influence To Hold Off Investigation Of MF Global
When the CFTC wanted to change a rule, Jon Corzine used his influence to stop them.
This morning, it was announced that Jon Corzine, the former Governor of, and Senator from, New Jersey, had resigned as CEO of the now bankrupt MF Global investment firm. Before that news came out, though, The New York Times was out with a report that Corzine had used his political influence to prevent a rule change that would have uncovered what MF Global was apparently doing with client funds:
Months before MF Global teetered on the brink, federal regulators were seeking to rein in the types of risky trades that contributed to the firm’s collapse. But they faced opposition from an influential opponent: Jon S. Corzine, the head of the then little-known brokerage firm.
As a former United States senator and a former governor of New Jersey, as well as the leader of Goldman Sachs in the 1990s, Mr. Corzine carried significant weight in the worlds of Washington and Wall Street. While other financial firms employed teams of lobbyists to fight the new regulation, MF Global’s chief executive in meetings over the last year personally pressed regulators to halt their plans.
The agency proposing the rule, the Commodity Futures Trading Commission, relented. Wall Street, which has been working to curb many financial regulations, won another battle.
The proposed rule would have restricted a complicated transaction that allowed MF Global in essence to borrow money from its own customers. Brokerage firms are allowed to use customers’ money to earn interest, not unlike banks, but this rule would have outlawed using customer funds for a loan to the firm itself.
It seems like an eminently sensible rule, if not one that should have been in place to begin with. In my own profession, the very idea of touching client funds in a lawyer’s trust account for any unauthorized reason is anathema, and Lawyer Trust Accounts are one of the most heavily policed areas of legal practice. It’s really pretty simple, the money that’s in the clients’ account isn’t your money, you shouldn’t be using it for anything that isn’t authorized. It’s actually rather surprising to me that there wouldn’t be a similar rule applied to the brokerage industry. Perhaps there’s a valid argument against the rule as it applies to the brokerage industry, but the story of how MF Global was able to get the CFTC to back off places Corzine directly at the center of events:
Leading the government’s effort to curtail these arcane practices was Gary Gensler, the chairman of C.F.T.C., who had worked for Mr. Corzine at Goldman Sachs. Mr. Gensler pushed for the proposed change in October 2010, and planned to bring it to a vote this summer.
MF Global has four outside lobbyists in Washington, tiny by Wall Street standards. But it was Mr. Corzine who marshaled the firm’s response to the proposal, lobbying most of the agency’s five commissioners directly. One commissioner said he visited with Mr. Corzine in MF Global’s headquarters, and acknowledged being impressed by the Wall Street titan, said a person with direct knowledge of the meeting who asked for anonymity because the meeting was private.
The C.F.T.C. polices the markets for futures trades. Staff members there often do not have a Wall Street pedigree.
Mr. Corzine’s background in finance made him highly credible, agency officials said.
Mr. Corzine’s efforts culminated on July 20, as the agency was preparing for a vote on the proposal. That day, MF Global executives were on four different calls with the agency’s staff. Mr. Corzine himself was on two of those calls.
One of the calls was with Mr. Gensler. Both men are active Democrats, and served on financial panels together recently.
Shortly after the calls, Mr. Gensler, aware that he lacked the support to push the vote through, decided to delay the proposal indefinitely. He did so at the urging of Republican commissioners, according to people familiar with the matter.
So what you have here is corruption at its best. A former Goldman Sachs Golden Boy, who went on to buy himself a Senate seat and the Governor’s Mansion in New Jersey, calls up his buddies in Washington, and manages to hold off adoption of a rule that would have likely uncovered the high stakes games that his firm was playing with client funds. Ironically, the current rule is one that was lobbied for by Lehman Brothers back in 2005:
Lehman Brothers actually pushed for the existing rule in 2005, which had the unintended effect of allowing firms to use repurchase agreements to hide losses in the short term. That’s how Lehman’s collapsing financial state escaped notice for as long as it did, as they hid billions in losses. That is why Gensler proposed the rule in the first place, but Corzine insisted that the rule change wouldn’t actually do anything for greater transparency on compliance.
Maybe Corzine was right, but the coincidence of the proposed rule change, Corzine’s lobbying, and the reasons behind collapse of MF Global (which may yet lead to criminal charges for someone) do make one suspicious at the very least. If nothing else, a story like this demonstrates one area where there’s possible unity between the Occupy Wall Street crowd and their critics. The kind of incestuous relationship between business and government that Corzine’s lobbying, indeed his entire career, represents is something the left and right ought to be able to agree is bad for the country, and for the economy. Corzine also stands as proof that crony capitalism is not solely a Republican phenomenon (although one would have thought that the case of Chris Dodd would have established that definitively), it’s a universal problem related to businessmen who see the ever expanding government as a tool to advance their business interests, and politicians willing to sell themselves.
We still don’t know if a crime was committed at MF Global, or what Corzine’s role in it may have been. What we do know, however, is that Jon Corzine used his influence to gain access to the CFTC to prevent the CFTC from adopting a rule change that would’ve revealed his company’s risky practices. That, my friends, is crony capitalism
I don’t entirely disagree with this. At the same time, it seems like a well-functioning government agency would very seriously consider comments on proposed regulations from the businesses most directly affected by those regulations. Where the line is drawn is not an easy call.
Fair statement. Certainly the firms that are to be regulated have the right to comment on proposed rule changes and present arguments as to why they are inappropriate. The thing is, there are already procedures for that, governed by the Administrative Procedures Act, the law which governs the Federal rulemaking process,.
It seems that what Corzine was doing went beyond that. Not exactly illegal perhaps, but it’s pretty clear you have to have had significant degree of influence to be able to set up hours-long conference calls with the CFTC commissioners themselves.
So this answers two questions that are currently being debated in America:
1. Does it benefit the American public to have less government regulation, especially of the finance sector?
I don’t see how anyone can possibly advocate for less restrictions on banking and securities, or oppose efforts to exert greater oversight and cotnrol of them.
2. What does it matter if some people are fantastically rich, compared to the rest of us?
This shows yet again that economic power begets political power; Jon Corzine was NOT equal before the law. Time and again, we see how the wealthy exist in their own consequence-free world, shielded from the laws that the rest of us have to obey. Having the 1% control so much economic power effectively destroys democracy.
When I talked about the cycle of influence and money between Washington and New York, I’m pretty sure Doug told me I didn’t know how lobbying worked.
On that, a pretty amazing Planet Money from a few days ago:
The Tuesday Podcast: Inside Washington’s Money Machine
Our American system of “discretely pay to (with plausible deniability) play” has reached a high art form.
Classic case of the 1% manipulating Government to their benefit…in ways the 99% cannot. Hang him from the highest yardarm, and all those like him.
On the other hand:
strikes me as poppycock. Corzine spent $62M of his own money on the NJ Senate race. Linda McMahon spent $50 of her own money losing the Connecticut Senate race. Given the difference in size of the states McMahon probably spent the same amount, if not more, per vote.
This is interesting:
Did Jamie Dimon Just Stop Jon Corzine From Going To Jail?
I will disagree with your last paragraph. Corzine bought the Senate seat and the Governor’s Mansion. McMahon (and Carly Fiorina and Meg Whitman, among others) were unsuccessful in doing the equivalent.
Agree entirely with the first paragraph. If convicted, he should get a harsher sentence due to his prominence.
Actually this is an argument for simple, streamlined regulations. Now, I can already hear the childish rants that this means no regulation but it doesn’t. It means simple, unarguable rules. Heavily policed as Doug says of the Lawyer Trust Accounts.
Every long winded regulation introduce ambiguity that can be exploited. In almost any set of regulations today, there is enough room for a smart lawyer to argue something is allowed or disallowed depending on the needs of his client. The exploiters and the lawyers had simple, concise regulations as there is no room to maneuver. The big government types like more regulation because they can interpret them to the citizens’ detriment and get away with it unless they are the wealthy who can sustain a court fight.
The answer isn’t more regulation, the answer isn’t another exception, the answer is clear direction that disallows unauthorized uses with strict penalties.
The exploiters and the lawyers
hadhate simple, concise regulations as there is no room to maneuver.
Addition: They love complex regulations at that enables the regulations to be interpreted to the benefit of political allies and cronies.
Perhaps for similar reasons as Doug I find the purported use of client funds to be baffling. I would call it conversion. It would be presumptively illegal unless the client gave permission or a regulation authorized the transaction. Conversion, like theft, does not require a single page from the Code of Federal Regulations to be the law, though the Code of Federal Regulations can offer a legal excuse for theft.
This is why regulations should be blunt instruments. Don’t want a sub-prime crisis? Pass a law requiring 20% down to qualify for a mortgage. Don’t want a derivatives crisis? Put it into an exchange with hard leverage caps.
No more financial implosions.
You say tomato, I say tomato.
Even by Democrat standards this is a major scandal that ultimately will result in a prosecution. It’s one thing to destroy via incompetence a major corporation within two years. It’s quite another thing to misappropriate over half a billion dollars in client funds and simultaneously to use one’s political influence with the regulatory body shrewdly to cover it up. Corzine probably should begin measuring the drapes for his prison cell at Club Fed.
@ Ben Wolf…
I’ve bought houses with next to nothing down…and I think I put 30% down on the one I own now. The amount down has no bearing on ability to pay.
@JKB: If you are inviting me to argue for long winded and convoluted regulations, I will RSVP my regrets.
However, regulations are one thing, enforcing them is another.
Would you agree that rich people are not equal before the law?
Bloomberg is now reporting the missing funds were in a custodial account the entire time…simply bad accounting I suppose.
Shame I already hung Corzine from the highest yardarm.
Oh well…sh** happens.
Corzine may or may not have broken any criminal laws, but he’s not taking any chances. In addition to resigning from MF Global today, he has also hired a very expensive criminal defense lawyer from a white shoe law firm. With the FBI, SEC and CFTA sniffing around, I guess he’s not taking any chances.
Will Obama for America return Mr. Corzine’s personal contribution? Will they return any of the half million he’s already bundled? Will they return any of the over $100K in contributions that have already come in from other employees at MF Global? Will Jon ever be Obama’s very good friend again, rather than just the simple campaign volunteer he is now referred to as?
Why should he? For bad accounting procedures that most likely existed before his tenure at MF Global?
I don’t think Moderate means what you think it means Mom.
This would have worked better as “will everyone return …”
The asymmetry is a give-away.
So Corzine lobbied against a rule, and was one of scores of other lobbyists from his industry doing the same. Gary Gensler, the chairman of C.F.T.C., was for the rule but didn’t have the votes with the unified Republican opposition. He then tabled the rule at the GOP commissioners’ behest.
I’d guess that it was more than “procedures,” but beyond that be aware of what MF Global’s business model was. They took money from investors, ratcheted it up 40 times(!) through leverage, and then bet on European bonds.
That was the kind of Russian Roulette, with 4 bullets in the chamber, that brought us the last major US crash. It wasn’t just the risk, it was the leverage. That leverage was enabled I think by the special relationship MF Global was granted with the fed as a primary broker-dealer.
Something is deeply wrong here. I suspect that Washington (as a whole!) is so desperate for growth in GDP that they are encouraging these people to play with matches and gasoline.
Isn’t that an appropriate solution to most regulations and laws — not more of them, just making laws concise, lacking ambiguities with more oversight and enforcement — applicable to our immigration laws as well?
@Hey Norm: Between 1940 to 1990, 20% was the typical downpayment required, and we had no mortgage crises. Sub-prime loans were made almost exclusively to people who put nothing down: that’s why they were considered sub-prime. Also notice that Texas weathered the storm far better than most states because state law required a substantial amount of money up front to qualify for a loan.
Good post Ben.
Not only was a 20% down payment required, but there was serious scrutiny as to one’s salary, other debt service in an applicant’s life to see if one could reasonable afford the costs inherent in owning a house. I remember that if a woman was pregnant, the lender’s often would not count her salary as being part of the income qualification required in buying the home, as they assumed she would be out of the picture as a wage earner. A little sexist, but, nevertheless, it indicates the stringency of the rules applied earlier on. Basically, there was proper, structured, enforced oversight over lending practices.
In the late 90’s forward, it all begin to break down, in the efforts to have everyone somehow ‘qualify’ for a loan. To me this falls on the backs of the government, the lenders as well as some home buyers who chose to take on pie-in-sky home ownership they could ill afford.
I’m fairly liberal, but facts require us to accept that liar loans require greedy creditors and greedy borrowers. One doesn’t exist without the other. Fannie and Freddie weren’t the epicenter for sub-prime but they did contribute by advertising they’d buy up any mortgage, no matter how bad. Government did not create sub-prime, and it didn’t force a single bank to make a single bad loan, but it did help foster perverse incentives and thereby made the problem worse.
@Ben Wolf: Fannie and Freddie were late to the subprime game, which was almost completely driven by the private market.
What got Corzine influence with the powers in Washington is that he is a fellow Democrat.
My understanding of the timeline is like David’s. Freddie and Fannie had higher standards than early MBS packagers, chased them down a bit though never sinking as far, but were really brought in to buy risky MBS in the the clean-up. They became sin eaters.
@john personna: That’s correct. Shareholder pressure forced Fannie and Freddie to lower their underwriting standards in order to recapture market share. Basically they put the word out that they’d underwrite crap, and the “market” responded by flooding them with it, whereas Ginnie Mae/FHA refused to lower standards and suffered no serious losses.
“It seems like an eminently sensible rule, if not one that should have been in place to begin with. In my own profession, the very idea of touching client funds in a lawyer’s trust account for any unauthorized reason is anathema, and Lawyer Trust Accounts are one of the most heavily policed areas of legal practice. It’s really pretty simple, the money that’s in the clients’ account isn’t your money, you shouldn’t be using it for anything that isn’t authorized. It’s actually rather surprising to me that there wouldn’t be a similar rule applied to the brokerage industry.”
Doug, Doug, Doug! What are you thinking? Don’t you realize that if you keep talking like this they’re going to kick you out of the Libertarian-Objectivist cadre? You’re supporting a government regulation, for God sake. Knock it off! The market never, ever, ever does improper things, and the captains of the free market can certainly NOT be accused of such behavior either. If you bunch of shysters are so dishonest that you have to police yourselves, that’s your business, but quit transferring your abuses onto people who have nothing to do with such dishonesty.
Next thing we know, you’re going to be out at Zucconi Park in your ratty hat and t-shirt, drumming with the other hippies! Now get a sheet of paper and write this one hundred times:
I am a good libertarian. A good libertarian never supports government regulations. Such regulations are anathema to the freedom that the market needs to survive and create the prosperity that all libertarians deserve. We need to dissuade the government from imposing such restrictions on our activities and confiscating our rightly earned rewards by tilting the playing field against us and making us losers.
@jan: Or the change in the 90s (actually, it was the 80s) could reflect a society in which wages had started getting so whipsawed around and property had become such a speculatory commodity (remember the “get rich through real estate” courses?) that most people could no longer afford houses without relaxed regulations and we needed housing to remain a “strong” component of our economic plan. It might be a combination of both, and other factors that we are including. It is, however, always easier to blame the people who purchased (believing that their incomes would rise as they worked [as many financial advisors were suggesting]–silly gooses) and found that the laws of economics are immutable.
And he is distinguishable from Republican fatcats when Republicans are in power how?
What got Corzine influence is that he is wealthy and politically well-connected. Democrat and Republican 1%ers do each other favors all the damned time.
You know, I’m thinking that this comment and mine just previous are really unkind. I mean, they might severely fυck up Bit’s internal dialogue leaving, him with nobody at all to talk to.
Texas faired well because they have strict regulation about refinancing. Far fewer homes were upside down.
Jan, don’t blame the governemnt for American culture, where stature is a function of ones “ride” or “crib”, or how many vacation homes one owns. Don’t blame the governmnet for bonehead leanding and irresponsible borrowing. What happened to individual responsibility?
I didn’t just cite the government, Robert. Everyone had a part to play in the irrational lending practices — poor to no oversight from the government, leading to sloppy, unscrupulous practices by banks, making it possible for unqualified buyers to game the system, buying a home they couldn’t afford.
This is what I said:
BTW, the bulk of the housing problems/mistakes were not derived from the sale of ‘vacation homes,’ either.
For one thing, we don’t notice nearly the coverage that, say. a Pataki, or a Christie in the same situation.