Here’s a follow-up to my post “Why the Collapse of MF Global Should Frighten You.”
John Carney reports for CNBC, Nov. 18, 2011, that hundreds of millions of dollars of customer funds missing from MF Global are probably “just gone.”
Carney received word from a lawyer briefed on the progress of the investigation being undertaken by various government regulators that investigators believe MF Global used customer money to make trades, such as buying sovereign debt securities.
Earlier there had been hope the money would turn out to be held as collateral in an account with one of MF Global’s creditors, such as JP Morgan Chase or Deutsche Bank. But that does not now seem to be the case.
Instead, the lawyer says, “What the investigation is focusing on now is who, if anyone, knew it was client money.”
MF Global used customer funds in a variety of ways, he says. In the futures business, MF Global was allowed to use “idle” cash in customer accounts to make investments on its own behalf. It would buy bonds and keep the coupon on them. The higher the coupon, the more profitable this was for the company.
The firm would also “borrow” from its clients accounts, posting collateral such as U.S. Treasurys. But as the New York Times has reported, the firm stopped backing the loans from customer accounts sometime in October.
Put bluntly, MF Global simply stole the cash.
Carney concludes that if that’s what happened, “it is probably impossible to recover the missing funds.”