The MF Global Saga Pieced Together part 2 of 3

How fast things have changed for MF Global and Corzine. Earlier this afternoon, the Associated Press broke news that MF Global admitted to co-mingling client money with its own funds during a phone call with federal regulators on Monday morning. The AP noted that the action could be civil violation. “Government rules require securities firms to keep clients’ money and company money in separate accounts.”

That revelation followed news this morning that CME Group, the exchange regulator that supervises MF Global, disclosed during an earnings call that MF Global had broken securities rules requiring brokerage firms to separate client money from their own trading accounts. Though CME Group’s chief executive Craig Donohue said he wasn’t sure the extent of MF Global’s violation, he said CME was launching an investigation. “While we are unable to determine the precise scope of the firm’s violation at this time, we are investigating the circumstances of the firm’s failure,” he said.

Part 2 

The bleak news was followed by MF Global being suspended from trading on the London Metal Exchange and CME, as Bloomberg reported this morning. “MF Global U.K. Ltd. was excluded from LME electronic and floor trading after it was declared a defaulter by LCH. Clearnet Ltd., which clears transactions.” That got traders talking. Jonathan Barratt, a managing director of Commodity Broking Services, told Bloomberg. “They are big players and this certainly raises concerns in the market. We have agricultural positions with them and for now, we’ll just have to wait and see what happens.”

1. 1.      Maybe customer cash was illegally mixed with company money

It seems “very likely” that the $700 million went missing because MF Global mixed clients’ funds with company cash to stay afloat when its own trades went south, says “Tyler Durden” at Zero Hedge. If that happened, “someone has to go to jail.” And that someone “should be none other than Jon Corzine himself.” Well, the feds are continuing to look into the matter, and while the investigation “is in its earliest stages,” it “may uncover something… intentional and troubling,” says The New York Times. “One can’t rule out misbehavior as a possibility,” Darrell Duffie, a Stanford University Graduate School of Business professor, tells the Financial Post. (MF Global’s lawyers aren’t commenting.)

2.  Hold on. It could be an honest mistake
It is possible that this was just an “accounting error” or a “technical glitch,” Duffie says. “Yeah,” an anonymous source at MF Global tells New Jersey’s Star-Ledger. The company was rushing to get its books in order for the sale, and customers were hurriedly pulling their money out of the troubled company. Those two factors could have combined to create a huge accounting error.

3. Other banks might share some blame
It’s far too soon to know exactly what happened, says David Teich at Talking Points Memo. Maybe MF Global really was using customer money to cover its positions. Or maybe it was just sloppy. But it’s also possible that other banks where MF Global had investments are “simply refusing to send the troubled firm its own money” amidst this week’s chaos.

4. The money may still show up
Remember, says The New York Times, we originally thought as much as $950 million was missing. But as MF Global gets its books in order, that number has since fallen to less than $700 million. “Additional funds are expected to trickle in over the coming days.” Stay tuned.

U.S. stocks had already taken a drubbing from bankruptcy, as The New York Times reported last night:”investors pummeled many financial stocks, fearful that problems were lurking on the books of other Wall Street firms. It was a crisis of confidence, not unlike

Last week, KPMG, the administrator for the liquidation of MF Global’s British arm announced it had recovered £795 million ($1.25 billion) from both customers’ accounts and corporate funds held by MF Global in that country. That amount is slightly more than the £724 million U.K. customers had in segregated accounts with MF at the time of the firm’s fall, meaning it is likely customers there will be paid out in full, with some money left over to pay creditors. In the announcement, KPMG said £594 million of the funds it had been able to recover had been in “client monies held by clearing houses, exchanges and Brokers.” While that is still accurate, what KPMG did not mention at the time was more than half of those funds apparently used to belong to American clients.

this story has been pieced together from many sources and news reports

See Part 3