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THE COLLAPSE OF MF GLOBAL, PART 1 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

DECEMBER 15, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–94 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

RANDY NEUGEBAUER, Texas, Chairman 

MICHAEL G. FITZPATRICK, Pennsylvania, 

Vice Chairman 

PETER T. KING, New York 

MICHELE BACHMANN, Minnesota 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEPHEN LEE FINCHER, Tennessee 

MICHAEL E. CAPUANO, Massachusetts, 

Ranking Member 

STEPHEN F. LYNCH, Massachusetts 

MAXINE WATERS, California 

JOE BACA, California 

BRAD MILLER, North Carolina 

KEITH ELLISON, Minnesota 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

December 15, 2011 ........................................................................................... 1 

Appendix: 

December 15, 2011 ........................................................................................... 87 

WITNESSES 

THURSDAY, DECEMBER 15, 2011 

Abelow, Bradley, Chief Operating Officer, MF Global ......................................... 11 

Baxter, Thomas C., Jr., General Counsel, Federal Reserve Bank of New 

York ....................................................................................................................... 59 

Berkovitz, Dan M., General Counsel, Commodity Futures Trading Commission (CFTC) ........................................................................................................... 50 

Cook, Robert, Director, Division of Trading and Markets, U.S. Securities 

and Exchange Commission (SEC) ....................................................................... 52 

Corzine, Hon. Jon S., former Chief Executive Officer, MF Global ...................... 10 

Duffy, Terrence A., Executive Chairman, CME Group Inc. ................................. 54 

Ketchum, Richard G., President, Chairman, and Chief Executive Officer, Financial Industry Regulatory Authority (FINRA) .............................................. 55 

Kobak, James B., Jr., Chief Counsel to James Giddens, Bankruptcy Trustee 

for MF Global, Inc. ............................................................................................... 57 

APPENDIX 

Prepared statements: 

Abelow, Bradley ................................................................................................ 88 

Baxter, Thomas C., Jr. ..................................................................................... 91 

Berkovitz, Dan M. ............................................................................................ 107 

Cook, Robert ...................................................................................................... 115 

Corzine, Hon. Jon S. ......................................................................................... 126 

Duffy, Terrence A. ............................................................................................ 148 

Ketchum, Richard G. ........................................................................................ 153 

Kobak, James B., Jr. ........................................................................................ 159 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Neugebauer, Hon. Randy: 

Letter from CME Group dated December 13, 2011 ....................................... 164 

King, Hon. Peter T.: 

Written statement of Tariq Zahir, Managing Member, Tyche Capital Advisors LLC ..................................................................................................... 184 

Abelow, Bradley: 

Written responses to questions submitted by Representative Posey ........... 185 

Corzine, Hon. Jon S.: 

Written responses to questions submitted by Chairman Neugebauer and 

Representative Posey .................................................................................... 187 

Duffy, Terrence A.: 

Written responses to questions submitted by Representative Posey ........... 189 

Kobak, James B., Jr.: 

Written responses to questions submitted by Representative Posey ........... 191 

(1) 

THE COLLAPSE OF MF GLOBAL, PART 1 

Thursday, December 15, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 1:08 p.m., in room 

HVC–210, Capitol Visitor Center, Hon. Randy Neugebauer [chairman of the subcommittee] presiding. 

Members present: Representatives Neugebauer, Fitzpatrick, 

King, Pearce, Posey, Hayworth, Renacci, Canseco, Fincher; Capuano, Lynch, Baca, Miller of North Carolina, Himes, and Carney. 

Ex officio present: Representative Frank. 

Also present: Representatives Hensarling, Royce, Garrett, 

Luetkemeyer, Huizenga, Dold, Grimm; Green and Perlmutter. 

Chairman NEUGEBAUER. The subcommittee will come to order. I 

remind Members that we previously agreed there will be 10 minutes of opening statements on each side. I ask unanimous consent 

that members who are on the Financial Services Committee—but 

not on the Oversight Subcommittee—who have joined us today will 

be entitled to participate: Mr. Hensarling, Mr. Royce, Mr. Garrett, 

Mr. Luetkemeyer, Mr. Huizenga, Mr. Dold, Mr. Grimm, Mr. Green, 

and Mr. Perlmutter. 

Without objection, it is so ordered. 

What we are going to try to do is do the Members’ opening statements. We may have an opportunity for the witnesses to give their 

opening statements. But we are told that somewhere around 1:30, 

we may have a series of votes. We think there are three or four 

votes in that series. We were going to try to continue the hearing 

during that period, but it looks like that would be difficult to do 

since there are three or four votes. So I think the best thing for 

the committee to do, unless the ranking member has a different 

idea, is for us to adjourn briefly, go make those votes, and then 

come back. 

I also ask unanimous consent that if any other members of the 

Financial Services Committee arrive, they be allowed to be a part 

of the hearing as well. At this time, I will now recognize myself for 

an opening statement. This is a very important hearing. We are 

here to find out exactly what happened at MF Global and with 

their bankruptcy. 

I think we want to accomplish three things in this hearing. Number one, we are very alarmed, and a lot of people are alarmed that 

we still have customers’ funds that are missing. And that number 

2 

jumps around anywhere from over $1 billion to a number less than 

that. It is very disturbing. This is very historic that these funds, 

segregated funds—I think it is the first time since the law was put 

in place that segregated funds have caused customers to suffer a 

loss. 

The second thing that we want to look at is, well, was there regulatory failure during this process? This is an entity that has a 

number of regulators. And we know that some regulators showed 

early concerns about what was going on in this organization. Others were caught by surprise. That is a very disturbing fact. 

The third thing that we want to look into is the corporate behavior within this organization during this time. What we know is that 

during the period of time where these transactions, these positions 

were put on the books, there were people within the organization 

who were saying that these were risky and in fact, if the market 

went a different way, that could actually take this firm down. And 

in fact, that is exactly what happened. 

This is all important because as we look at trying to put this 

puzzle together, what we need to ascertain is where the failures 

were. Because there will be those who will call to say, we needed 

more regulations. I would remind you that we had Sarbanes-Oxley 

and Dodd-Frank in place, and this event actually happened anyway. So when we look at the regulatory side, we need to see if we 

had regulators who weren’t communicating, regulators who weren’t 

doing their job, exactly what was the reason that some of these regulators were caught by surprise. 

I think the other thing is internally, when we look inside the corporate structure of this company, what we saw was that one person 

had an extreme amount of authority, Mr. Corzine. He was the 

chairman of the board. He was the CEO of the company and, according to some people that we have interviewed, one of the principal traders of this company. And so, therefore, there was no real 

barrier or firewall for protecting the investors and the customers 

of this company. So I hope that we will have a very robust hearing 

today. And we look forward to hopefully finding some of the answers to some of these unanswered questions. 

With that, I now yield to the ranking member, Mr. Capuano. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Mr. Chairman, I know that the obvious question everyone wants 

to know is, where is the money? I don’t expect that we will be able 

to get an answer today or any day. There are other people who are 

in a better position and more intelligent than we are to be able to 

chase that down. But there are an awful lot of questions left here 

for me, as far as I am concerned. 

First of all, I would like to talk about some of the conflicting 

statements that have come out over the last couple of days, the last 

week or so with different hearings. Different people have said different things. I just want to know what the truth is. I particularly 

am interested to know whether there is anyone else out there who 

has similar exposure doing either the same things or different 

things. Does anybody know about it? And does anybody care? I say 

that because the more I look into this, the more I am coming to 

a, not a conclusion, but at least a suspicion that there may well 

have been very little here that was technically illegal. I have read 

3 

through the testimony. The word ‘‘misuse’’ has been used a lot. But 

to me, that is a legal statement, not a statement as to where we 

want to go, where we want to be. 

There are still a lot of questions of what was allowed, should it 

have been allowed? Is it now closed off for future people going forward? There are all kinds of things here that I think we need to 

talk about. We need to ask what the ratings agencies were doing. 

We need to ask what the auditors were doing, whether we have too 

many regulators. The last I heard, MF Global was subject to 20 different regulators. That is ridiculous. 

I am not afraid of regulation, but that can’t possibly work. It 

does nothing but allow for forum shopping. It does nothing but 

allow somebody to point fingers at someone: ‘‘It wasn’t my job; it 

was his job or her job.’’ We have a significant degree of self-regulation in this particular case. I think it is a fair question of whether 

self-regulation is still applicable in today’s world. It was one thing 

in the 1880s; it is another thing today. So for me, again, where the 

money is, that is going to be the headlines. That is what everybody 

wants to know. And I don’t think we are going to find out. But I 

hope that this is the first of a series of hearings over the next several months, because I just can’t imagine we will be able to get the 

answers to the real questions I have today. But hopefully, we will 

be able to do so in the future. With that, Mr. Chairman, I will yield 

back. 

Chairman NEUGEBAUER. I thank the gentleman. 

The vice chairman of the subcommittee, Mr. Fitzpatrick, is recognized for 2 minutes. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

What we are here to examine today is not simply a headline in 

a financial newspaper. The collapse of MF Global was one of the 

largest bankruptcies in our Nation’s history. This failure has 

changed lives, impacted businesses, and most certainly will cost 

American jobs. 

I look forward to hearing today’s testimony. I also look forward 

to reviewing the actions of the relevant regulatory agencies: Did 

they provide proper oversight? And what could they have done to 

prevent the extensive risk-taking that apparently occurred at MF 

Global, reportedly against the advice of its own chief risk officer. 

Once again, the confidence in our financial markets has been shaken. 

But the biggest frustration of all is that these are real people 

who have lost real money. This is something more than a loss on 

a balance sheet. They are farmers. They are regular everyday people, including constituents of mine in Bucks County, Pennsylvania, 

who have been harmed. The trustee continues to work with regulators on identifying the various transfers and trying to locate 

missing funds. I certainly hope that is true. The victims need to be 

made whole. And anyone who acted improperly certainly needs to 

be punished. 

My hope is that today’s hearing helps to ensure that this doesn’t 

happen to another family in Bucks County, or in the heartland, or 

anywhere in the United States. People are tired of opening their 

newspapers and reading stories about failures on Wall Street and 

failures of our regulators to identify and catch problems. I share 

4 

the frustration that many Americans feel reading stories about a 

major financial institution failing. And I sympathize with the hardworking Americans whose lives have been negatively impacted by 

the flaws in the Federal Government’s regulatory regime. There 

was a breakdown in corporate leadership, which I think has been 

acknowledged in some of the previous hearings. Clearly, there was 

also a failure in our regulatory structure. Multiple agencies had jurisdiction in this case, and there was a lack of communication and 

coordination that might have identified the problem sooner. I expect that this hearing will help us to continue to bear out the facts 

of what happened at MF Global, and allow us to implement the 

necessary reforms. 

Finally, Mr. Chairman, I hope that as we identify these problems, it helps us to map out a way forward that restores confidence 

in our financial markets, especially as our regulatory system undergoes its largest restructuring in over 80 years. And I look forward to the testimony. 

Thank you for calling the hearing, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now, the ranking member of the full committee, Mr. Frank. 

Mr. FRANK. Thank you, Mr. Chairman. 

This is an interesting switch. For some time now, I have been 

hearing my Republican colleagues complain about overregulation 

and interference with the private sector. Today, we are hearing 

complaints about underregulation and insufficient interference 

with the private sector. 

The facts are clear that whatever was done incompetently, incorrectly, perhaps dishonestly—although no one has established that 

yet—was done in the private sector. The complaint is that the public sector didn’t do enough regulation. 

It is true that the financial reform bill is now in place. But it was 

signed into law in July of 2010. We have not yet seen its full implementation. In fact, one very important rule that is relevant to trying to deal with the problems here was just adopted earlier this 

month. 

And the way in which it was held up is relevant. The Chairman 

of the Commodity Futures Trading Commission (CFTC), Chairman 

Gensler, who I think does a very good job, couldn’t get the third 

vote he needed. This was not the first time. We had the same problem with regard to the anti-speculation rule. 

And I say that because this Commission structure, which can 

lead to delay in the adoption of important rules, is exactly what my 

Republican colleagues want to engraft onto the consumer bureau, 

hoping, I believe, for similar results: much less effective action. 

But let’s go back to the whole question of regulation. Members 

have said, well, the regulators didn’t do a good enough job. This is 

partly because the extent to which we can expect our regulators to 

rely on volunteer help is limited. The regulators are not the Salvation Army. 

What we have are my Republican colleagues consistently resisting the funding that the Commodities Futures Trading Commission, the primary regulator—and while people have said there were 

too many regulators, there was clearly a primary responsibility on 

the CFTC. I don’t think regulatory diversity was the serious probVerDate Nov 24 2008 18:25 Jul 16, 2012 Jkt 072635 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\72635.TXT TERRIE
5 

lem here. What we have is a significant lack of funding for the 

CFTC. These are complicated matters. They require intelligent people to do this. The President asked for $308 million, $117 million to be funded 

through a user fee, that is, the President wanted the additional 

money to come from those in the business. But my Republican colleagues decided to defend the financial interests of those in the 

business and rejected that so that it all comes from the taxpayer. 

So, first, they make sure that we don’t get money from the industry, and it all comes from the taxpayer. Then, they use the fact 

that because of them it is all coming from the taxpayer as a reason 

not to fund it adequately because they say the taxpayer can’t afford 

it. Although $100 million extra from the taxpayers, from people 

who support the wars in Afghanistan, Iraq, Moonshots and everything else, is somewhat hard for me to accept too seriously. 

Let me ask you how much time I have left, Mr. Chairman? 

Chairman NEUGEBAUER. The gentleman’s time has expired. 

The ranking member of the subcommittee has yielded you additional time. 

Mr. FRANK. Thank you. 

They are inadequately funded. The Republican Appropriations 

Committee this year voted them $172 million, less than they have 

in the current year. That is for the next fiscal year. The Democratic 

appropriators did help to get it up to $205 million, but $55 million 

is kept from personnel and put only into IT, over the objection of 

the CFTC. So the CFTC has been hampered. 

I also believe that a law that has been in effect only a little over 

a year, not fully a year when some of these events started, is not 

an adequate test of the law. A fully funded CFTC, able to adopt 

regulations, would do the job. And I think my Republican colleagues have this dilemma. They are opposed to regulation in general. They are now saying, the regulation should be better. But I 

invite people to do a little content analysis, in which we are told 

that these regulators are interfering with our private enterprise. 

You cannot logically and sensibly be for regulation in the particular 

when you have opposed regulation in general and in fact have disabled the regulators from doing it. 

And then, there is one other question I want to raise, and that 

is the self-regulatory model. Much of this was self-regulatory model 

followed. And I have been skeptical of some proposals we have had 

to increase that. I want to talk particularly about the CME. And 

I have a great deal of regard for people at the CME. It is a very 

well-run organization. When we drafted the legislation, I was interested in their input. But I do want to raise a question as to whether or not there is a conflict of interest. The National Association of 

Securities Dealers, which FINRA is the self-regulator for the securities part, they spun off the regulatory agency from the people 

running the exchange. 

At CME, no such spinoff has taken place. And I don’t mean to 

suggest in the slightest that there was any conscious softening by 

CME. I have too much regard for the people there to believe that. 

But human beings are human beings. And I believe one of the 

things we have to look at is if you are going to have an SRO, 

should it be spun off in the way that FINRA was spun off from the 

6 

National Association of Securities Dealers in that exchange? 

Should we ask for a similar degree of spinoff if the CME and people 

in that area are also going to be an SRO? 

Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentleman. And now the 

gentleman from California, Mr. Royce, for 1 minute. 

Mr. ROYCE. Yes. It is not that Republicans are opposed to regulation in general. 

We are opposed to incompetent regulation. We are opposed to the 

kind of regulation that would not allow, for example, the systemic 

risk regulation of the GSEs. So what Republicans want to see is 

competent regulation, including over at the CFTC. Customer segregation rules have been around in this country for 75 years. And 

these rules are not convoluted. They are rather easy to understand 

and to enforce. Yet, the CFTC failed. And why this happened is one 

of the many questions we hope to get answered here today. 

Another concern we have is what happened at MF Global in 

terms of the $1.2 billion in missing funds. And on top of that, the 

concern that we have in terms of why the Federal Reserve would 

grant to this organization the status that it was given in terms of 

primary dealer, given the weak credit rating, the bleeding of cash, 

the $137 million that it was lost the year prior by the firm, the 80 

regulatory actions taken against it since 1997. Is the Democrat answer for regulation leading us to a situation where political pull 

and political interference intercedes and prevents the rule of law 

and prevents the right kinds of decisions being made by the New 

York Fed because of the connections of people politically? Those are 

some of the questions we want answered. 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. Baca is recognized. 

Mr. FRANK. Would the gentleman yield for 10 seconds? 

Mr. BACA. Yes. 

Mr. FRANK. I would just say to the gentleman from California, 

he said that Republicans are for GSE reform. That leaves me to 

question why in the 11 months of this Congress, they haven’t done 

it. Of course, the answer may be for the same reason they didn’t 

do it in the 12 years before that. My Republican colleagues are all 

for GSE reform when they are in the Minority, but when they are 

in the Majority, somehow they can’t seem to do it. 

Mr. ROYCE. Reclaiming my time, you and I have debated this 

issue— 

Mr. BACA. Excuse me, it is my time. 

I had yielded time to him. 

Chairman NEUGEBAUER. I think we need to separate the time 

here. 

Mr. BACA. Getting between the rings here. 

Chairman NEUGEBAUER. Mr. Baca, you are recognized. 

Mr. BACA. Thank you very much, Mr. Chairman, and Ranking 

Member Capuano, for calling this hearing. 

I also want to thank the witness, Governor, Senator, Mr. 

Corzine, for being here. 

I have to say I wish it was under better circumstances, and you 

wish it was under better circumstances. But with $1.2 million in 

7 

customer funds completely missing, I think it is clear to everyone 

why we are here today. 

Where is the money? Where did it go and why? We want answers. Over the past 5 years, the American people have had their 

share of disappointment with the financial system. There has not 

been enough oversight and accountability. And that is why the 

Frank-Dodd legislation came into existence, to make sure that we 

had a lot more oversight and accountability. 

And it seems like now we want to do away with a lot of the accountability and oversight, yet we want to get back to these answers. That is why I really believe that we should continue to have 

the oversight and the funding that is there. From the near economic collapse to the massive frauds like the one orchestrated by 

Bernie Madoff now to the failure of MF Global, it is clear that the 

need for improvement in oversight and accountability still remains. 

And at the heart of it, that is what is so troubling to Members 

of Congress and the American public. Not the regulators or executives who dropped the ball in their responsibilities—and I state not 

the regulators or the executives who dropped the ball in their responsibilities—but that the American public, innocent investors are 

left with the check. 

I do think it is curious that at a time when we are seeing a need 

to increase oversight and enforcement, as displayed in this case, 

some of my colleagues are intent on defunding some of our regulators who are charged with these same goals. And it is very curious in terms of why is it at a time that we need to have more? 

Today, I am hopeful that we will get the answers. 

This is the third congressional hearing on this matter. And I 

don’t think anyone has been overly impressed with what has happened at the previous two. 

I am hoping that can change today. Again, I want to thank the 

chairman and the ranking member for calling this hearing. I thank 

the witnesses for being here. 

And I yield back the balance of my time. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from Texas, Mr. Canseco, will be recognized for 11⁄2 minutes. 

Mr. CANSECO. Thank you, Mr. Chairman, for calling this meeting. 

Companies go bankrupt in the United States every day. And 

while I do not believe it is the role of Congress to examine every 

bankruptcy that occurs in the private sector, the case of MF Global 

is an exception. 

Given that MF Global’s bankruptcy is the 8th largest in the 

United States’ history, it is hard for Congress to not ask, what happened? It is extremely important for this committee to examine the 

consequences for the financial sector of MF Global’s bankruptcy, as 

well as the impacts on end users, such as farmers and ranchers, 

who access futures markets in order to hedge their risks. 

There are also several questions that MF Global’s bankruptcy 

raises that need to be answered. First, MF Global received a number of regulatory sanctions throughout the years, yet was still allowed to dramatically increase its risks, notably in its exposure to 

European sovereign debt. 

8 

The most important question that needs to be answered, how- ever, is what happened to $1.2 billion of client money that has gone 

missing and nobody seems to know what happened to it? The first 

time customers have suffered losses from the improper handling of 

customer funds by a clearing member, the case of MF Global shows 

not just a failure of company management, which I would say demonstrates as much concern for its risk as did the captain of the Titanic, but also a profound failure in our regulatory structure that 

needs to be addressed. 

Nine years ago, we were told that Sarbanes-Oxley would put an 

end to accounting gimmickry. And last year, we were told that 

Dodd-Frank would lead to regulatory coordination that would make 

our financial system safer and sounder. Despite the massive increase in the government’s authority, neither of these promises 

held in the case of MF Global. And yet, the private sector continues 

to pay the enormous regulatory tab of these two bills. I look forward to hearing from our witnesses today just how this breakdown 

happened and what can be done to fix it. 

Thank you. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from New York, Mr. Grimm, is recognized for 2 minutes. 

Mr. GRIMM. Thank you, Chairman Neugebauer. 

I appreciate you calling this meeting. As unfortunate as it is, 

really, to have a need for this hearing, I am eager to hear exactly 

and explicitly how the events that led to the collapse of MF Global 

actually transpired. 

I am anxious to know exactly who was involved in commingling 

funds if that occurred. Who gave the order for such approved transfers? Who else was involved in that approval? Who actually executed this apparent illegal transfer? 

Moreover, details about and insight into what happened and 

what appears to be an institution that did not have a strong internal compliance control, but rather possibly had a CEO who controlled most aspects of the firm, ranging from trading strategy, essentially betting the farm on European sovereign debt, to possibly 

ignoring chief risk officers’ repeated warnings, and also to possibly 

having a controlling influence over the board of directors. Therefore, I look forward to hearing with some specificity the answers to 

the questions that other committees and the media have not been 

able to extract. Although many reports and investigations—aspects 

of the investigation I have had the opportunity to read, I would 

rather not assume any facts, none of this case, but rather, I would 

like to learn it firsthand, to be educated today as much as we can 

about the entire truth. And the one person that I believe can shed 

as much light on this is our witness today, Mr. John Corzine. 

And with that, I yield back the balance of my time. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentlelady from New York, Ms. Hayworth, is recognized for 30 seconds. 

Dr. HAYWORTH. Thank you, Mr. Chairman. 

Governor Corzine, Mr. Abelow, I serve the Hudson Valley of New 

York, and I know former partners at Goldman Sachs who know 

both of you and respect you greatly. 

9 

I don’t imagine that anything we will ask at this hearing will be 

new to you. I do have the strong impression that someone at MF 

Global knows what happened. And I hope merely that in the fullness of time, you will apply your talents and your minds to enlightening us as to how we can prevent something like this collapse 

from ever happening again. And I thank you for your testimony 

today. 

Chairman NEUGEBAUER. I thank the gentlewoman. 

And now the gentleman from New York, Mr. King, is recognized 

for 1 minute. 

Mr. KING. Thank you, Mr. Chairman. Thank you for bringing the 

witnesses here today, for holding this hearing. Senator Corzine, it 

is good to see you again, although it is unfortunate that it has to 

be under these circumstances. 

As my colleague Mr. Grimm said, this hearing today addresses 

the most serious questions both about management and about the 

extent to which we have control, we have jurisdiction. The fact that 

$1.2 billion can be missing and not accounted for, the fact that at 

a time when every taxpayer is trying to account for every penny, 

we can have persons such as yourself, Governor Corzine, who made 

your reputation in this field. This is your world, not mine. And yet 

you not being able to account for the money raises the most serious 

questions. I don’t know if they will be answered today. They really 

haven’t been answered up to now. There have been some differences in the testimony. 

But I think it is important to keep our eye also on the innocent 

people out there being hurt. I have a constituent of mine, Tariq 

Zahir, who is the managing member of a commodity trading advisory company in my district. Right now, he is himself on the verge 

of losing his business because of the actions that were taken by MF 

Global. 

And Mr. Chairman, I would, if I could just submit this statement 

for the record from my constituent, Mr. Tariq Zahir, managing 

member of Tyche Capital Advisors LLC in New York, to put a 

human face on the suffering this has caused. And hopefully, we 

will find out what happened, why it happened, and how to prevent 

it from ever happening again. With that, I yield back. 

Chairman NEUGEBAUER. Without objection, it is so ordered. 

I remind all Members that your opening statements will be made 

a part of the record. 

Without objection, I would like to enter into the record materials 

sent to the committee from the Chicago Mercantile Exchange. 

Without objection, it is so ordered. 

Now, I am going to introduce our first panel, the Honorable John 

Corzine, former chief executive officer of MF Global; and Mr. Bradley Abelow, chief operating officer, MF Global. 

Gentlemen, I want to remind you that your written statements 

will be made a part of the record. And we ask you to summarize 

that testimony in 5 minutes. 

Before you do that, I would ask both of you to please stand. I am 

going to ask you to raise your right hand. 

[Witnesses sworn.] 

Chairman NEUGEBAUER. Please be seated. 

10 

As I stated, your written statements will be made a part of the 

record. 

You are recognized for 5 minutes. Mr. Corzine, you are recognized. 

STATEMENT OF THE HONORABLE JON S. CORZINE, FORMER 

CHIEF EXECUTIVE OFFICER, MF GLOBAL 

Mr. CORZINE. Thank you, Chairman Neugebauer, Ranking Member Capuano, and distinguished members of the subcommittee. Let 

me begin with the fact that, as I have said at each of the congressional hearings, every day I think about the fact that MF Global 

bankruptcy has been devastating to people’s lives. 

Chairman NEUGEBAUER. Mr. Corzine, I am going to interrupt 

you. Is your button on? 

Mr. CORZINE. It is, sir. 

Chairman NEUGEBAUER. Okay. You may need to talk just a little 

bit louder. 

Mr. CORZINE. I recognize that my concerns about their anguish— 

are you hearing me now, Mr. Chairman? 

Chairman NEUGEBAUER. Yes, sir. 

Mr. CORZINE. I recognize that my concerns about the anguish of 

those affected provide no solace for their losses and hardship, 

whether those hurt are customers, employees, or investors. As the 

chief executive officer of MF Global, I truly apologize to all those 

affected. 

As you know, I have provided a written statement to the subcommittee, and I have previously testified before the House and 

Senate Committees on Agriculture. I am here to answer your questions as well. 

Before I do, I wish to make a few additional points in light of 

my earlier testimony. First, I have been repeatedly asked over the 

last week whether I directed or authorized the improper use of customer funds. I have tried to answer those questions to the best of 

my ability. 

But once again, let me be clear, I never gave any instruction to 

misuse customers funds, I never intended anyone at MF Global to 

misuse customer funds, and I don’t believe that anything I said 

could reasonably have been interpreted as an instruction to misuse 

customer funds. 

And as I have repeatedly stated, I was stunned on Sunday night 

to learn that there was a problem with many hundreds of millions 

of dollars of customer funds. 

Second, after I testified on Tuesday, Mr. Duffy of the CME suggested he recently learned that someone heard someone else say 

that they understood that I knew that customer funds may have 

been improperly loaned to the MF Global affiliate in Europe during 

the last days of the firm’s operation. I don’t know the source of the 

suggestion. 

Let me be clear: While the last few days of MF Global were chaotic, I did not instruct anyone to lend customer funds to MF Global 

or any of its affiliates, nor was I told that anyone had done so. 

Third, Mr. Duffy’s comments may relate to the overdraft situation at JPMorgan Chase, about which I have previously testified. 

I became aware of that situation on the morning of Friday, October 

11 

28th. At that time, I was trying to sell billions of dollars of securities to JPMorgan Chase in order to reduce our balance sheet and 

generate liquidity. JPMorgan Chase told me that they would not 

engage in those transactions until overdrafts in London were 

cleaned up. I contacted the firm’s back office in Chicago and others, 

and asked them to resolve this issue, which I understood they did. 

Later on Friday, JPMorgan Chase contacted me again and said 

they needed assurances that the transfer of funds did not violate 

CFTC rules. Since I had no personal knowledge of the issue, I 

asked senior people in the back office and the legal department to 

become directly involved in responding to JPMorgan Chase’s request. The back office in Chicago explicitly confirmed to me that 

the funds were properly transferred. And I understood that 

JPMorgan Chase was satisfied, since they executed billions of dollars of trades with MF Global. 

Fourth, while I obviously share many of the same questions that 

you have about what went wrong at MF Global regarding our controls on segregated accounts, I did not have such concerns prior to 

Sunday night. During my tenure, we hired many people, employed 

dozens and dozens of highly regarded and highly trained professionals in the area of risk, finance, compliance, legal, internal 

audit, and back office operations. We also retained prominent outside auditors, consultants, and attorneys, to make sure MF Global 

operated lawfully. 

Indeed, we were subject to reviews, audits, and inspections by internal and external auditors, consultants, and regulators. To the 

best of my recollection, none came to me with any major issues or 

concerns about the quality of our people, systems, or procedures. 

Finally, before I respond to your questions, I want to offer two 

apologies. First, I want to apologize to the subcommittee in advance. Because I have not been able to review many relevant 

records, I cannot be as helpful to the subcommittee as I would like 

to be. 

And second, and frankly more important, I want to again apologize to our customers, our employees, and our investors. My pain 

and embarrassment do not blind me to the fact that they bear the 

brunt of the impact of the firm’s bankruptcy. 

I look forward to the questions. 

[The prepared statement of Mr. Corzine can be found on page 

126 of the appendix.] 

Chairman NEUGEBAUER. Thank you. 

Now, Mr. Abelow, you are recognized for 5 minutes. 

STATEMENT OF BRADLEY ABELOW, CHIEF OPERATING 

OFFICER, MF GLOBAL 

Mr. ABELOW. Thank you, Mr. Chairman, Ranking Member Capuano, and members of the subcommittee. The bankruptcy of MF 

Global was a tragedy for our customers, our employees, and our 

shareholders. For many of our customers, including many of your 

constituents, who have still been unable to retrieve funds that are 

rightfully theirs, it has imposed extreme financial hardship. 

More than 2,500 employees have already lost or will soon lose 

their jobs through no fault of their own. Shareholders have seen 

the value of their investments reduced to almost nothing overnight. 

12 

As the president and chief operating officer of MF Global Holdings, I am deeply sorry for the hardship they have all endured. 

While I know nothing I say can ease their pain, I hope that 

through my testimony today, I can help this committee understand 

what happened at MF Global and how we are attempting to unwind the company in a manner that provides maximum value for 

all parties. 

I joined MF Global in September of 2010 as the chief operating 

officer. I was given the additional title of president in March of 

2011 and served in that capacity through the bankruptcy filing this 

October. After the filing, the firm’s board asked me to remain in 

my position to work with the various trustees and administrators 

to close the firm’s operations, which I have attempted to do over 

the last 6 weeks. 

From my perspective, based on what I was able to observe at the 

time, there were a number of factors that led to MF Global’s demise. First, it appeared that by mid-October of this year, the market had become increasingly concerned with the firm’s exposure to 

European sovereign debt. 

Second, beginning in late October, the ratings agencies rapidly 

and repeatedly downgraded the firm’s credit ratings. 

Third, the company reported disappointing earnings on October 

25th. 

The combination of those three events increased concern about 

exposure to European sovereign debt; a series of ratings downgrades and disappointing earnings created an extremely negative 

perception in the market, resulting in a large number of the firm’s 

trading and financing counterparts pulling away from MF, which 

dramatically reduced the firm’s liquidity. 

That reduction in liquidity, a classic run on the bank, led MF 

Global to attempt to sell all or part of the firm in order to provide 

liquidity and protect the interests of our employees, shareholders, 

creditors, and customers. 

When those efforts failed, MF Global filed for bankruptcy on October 31st. 

I know this committee is interested in finding out what amount 

of segregated client funds went missing in the final days, how it 

happened, and where those funds are and what might eventually 

be returned to the firm’s clients. I am deeply troubled by the fact 

that customer funds are missing. And I can assure you that I share 

your interest and the public’s interest in finding out exactly what 

happened. 

At this time, however, I do not know the answers to those questions. They are being investigated by the trustees who have taken 

over management of MF Global and have control over its records 

and accounts, and a host of regulatory and investigative agencies. 

While I do not know what they have found, I do know that all 

of the parties are working hard to find answers. And I hope they 

are able to get to the bottom of the issue as soon as possible. 

Since the company filed for bankruptcy, I have focused every day 

on minimizing the effect on customers and employees. There is no 

way to turn back time and undo all the damage caused by the collapse of MF Global. But in the last 6 weeks, I have worked day and 

night to reduce costs and maximize the remaining value in the 

13 

business. Because MF Global was a global firm, with operations on 

exchanges in more than 70 countries, there are separate entities 

with separate systems and books around the world. And I have 

worked to foster cooperation and communication among those entities. There are a number of different parties now responsible for 

unwinding the firm’s operations. It has been an enormous effort to 

coordinate with them to generate the maximum possible recovery 

of assets. While it is only a small measure, given the number of 

people who have lost their jobs, I am also doing whatever I can to 

help former employees find new employment. 

I believe it is important to examine the issues that led to MF 

Global’s demise. The firm has attempted to be as open and transparent as possible. I hope I can provide some assistance to the committee today in its investigation. As I said, there is no way to undo 

the damage that has been done by MF Global’s bankruptcy. But it 

is my hope that efforts such as this one to gather facts and provide 

a clear picture of what occurred will assist policymakers, regulators, and participants in the financial service industry in avoiding 

such tragic events in the future. 

I look forward to answering your questions. 

[The prepared statement of Mr. Abelow can be found on page 88 

of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. 

And we will now go to the question-and-answer period. 

Mr. Corzine, you made some efforts today to kind of clarify some 

of your previous testimony and indicated that this will be your 

third time to testify. 

We have been collecting a lot of information and talking to a lot 

of different people. And I want to maybe see if some of these facts 

will help you with your recollection. It appears, in the early morning hours of October 31st, MF Global’s treasurer and the CFO of 

the global North American operations informed the CME that deficiency in customer accounts, not an accounting error, but roughly 

$700 million in customer segregated funds had been moved to the 

broker-dealer side of the business to meet the liquidity needs of the 

firm. Were you aware of that transfer? 

Mr. CORZINE. I am aware of the phone conversation with regulators that I think you are speaking to at roughly 2 or 2:30 on that 

morning of the 31st. I am not aware that we used the terms that 

you used. 

I am aware that we made very clear that there was an 

unreconciled imbalance in segregated funds. And frankly, I thought 

the number was higher than the $700 million also. 

Chairman NEUGEBAUER. I think in that same meeting, it was 

represented that a $175 million loan advance was made to the 

global, MF Global UK. Were you aware of that loan? 

Mr. CORZINE. Mr. Chairman, I am not aware of that conversation 

as a part of that meeting. And it is possible for two things. First 

of all, we were operating very late in the day, and after many, 

many days. I would also say that I stepped in and out of that meeting on a regular basis, both to consult with counsel and also speak 

to the board. So that may have been said. 

I don’t have a recollection of that. 

Chairman NEUGEBAUER. Yes. 

14 

Two hours later, in a separate conference call, it was represented 

that you knew about the loans from customer segregated accounts. 

The CFO of MF Global’s North American operations stated in a 

conference call that, ‘‘Mr. Corzine knows about the loan.’’ 

Mr. CORZINE. Mr. Chairman, as I said very clearly in my opening 

remarks, I did not in any way know about the use of customer 

funds on any loan or transfer. 

Chairman NEUGEBAUER. Mr. Corzine, you knew you were having 

liquidity problems. Is that correct? 

Mr. CORZINE. We knew we were in a difficult position. 

Chairman NEUGEBAUER. Yes. And did you say, we have to fix 

this? We have to find the money? 

Mr. CORZINE. I think I am responding, you are quoting back to 

me something that I said at the time when the CFO of the global 

entity informed I think a group of us, in which Mr. Abelow and I 

were both a party to, that there was an unreconciled difference 

with our segregated accounts. 

Chairman NEUGEBAUER. And so, I think one of the things that 

is perplexing, Mr. Corzine, you have been with Goldman Sachs, you 

have been governor, you have been a Senator, your recollection of 

these events, or your lack of recollection is somewhat puzzling to 

a lot of us. Because you had to know that things were not going 

well and that these positions were unraveling. And you, all of a 

sudden, just find out that there is money missing from customers’ 

accounts? You are the CEO of the company. You are the chairman 

of the board. How is it that all of a sudden, these people acted out 

of your instruction to make these transfers? 

Mr. CORZINE. Mr. Chairman, we had policies, procedures, and I 

believe qualified personnel who had the responsibility to make sure 

that customer funds were protected. 

Chairman NEUGEBAUER. Were these competent people? 

Mr. CORZINE. From every element of the information that I had 

gained up to this point, and I think I put that in my oral statement, there was no reason that I could think of that they weren’t 

competent. I relied upon them. 

Chairman NEUGEBAUER. The thing I am troubled by, Mr. 

Corzine, is when you look at how this company got to this point, 

basically you had a chief risk officer who was telling you that these 

trades could cause a liquidity crisis for this firm. You were repeatedly told that. And yet, you disregarded that. And in fact, that gentleman was then replaced, and the positions doubled from then. So 

when you talk to me about how you had procedures in place to protect the interests of the company, yet in many ways there was no 

firewall built in place for the transactions that you were actually 

the primary trader on. So I am having a hard time believing that 

you were relying on a firewall when basically you were operating 

without a firewall. 

Mr. CORZINE. Mr. Chairman, the issue with regard to trading positions was fully vetted with our board of directors, with risk officers, both the one you spoke about and his successor, with regard 

to the nature of the risks that were a part of those positions. And 

they were authorized by the board. 

That is different than the clearance and settlement and money 

transfer aspects, which there are controls that I think, in my writVerDate Nov 24 2008 18:25 Jul 16, 2012 Jkt 072635 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\72635.TXT TERRIE
15 

ten testimony, I say I had little experience nor little involvement 

in, in my time at MF Global. 

Chairman NEUGEBAUER. I hear what you are saying, that may 

be different functions, but I think it is indicative of the corporate 

culture that if people were taking money and sending it around 

without your authorization, without—you have the chief financial 

officer, the treasurer of the company, they don’t know about money 

being transferred around? That is a little perplexing to me. 

Mr. CORZINE. Mr. Chairman, I know that we had policies, procedures, and people in place. 

Chairman NEUGEBAUER. Obviously, they were not being followed 

or—that is what we are all trying to figure out is if you had competent people in place, you had the top people here saying that we 

took money out of customer accounts, and we have people saying 

that you knew that they had taken money out of— 

Mr. CORZINE. First of all, as I said in my opening statement, I 

don’t know how to respond to something that somebody said to 

somebody else to somebody else who is unidentified and I can’t 

speak to. 

I do know that I never authorized anyone to use customer funds, 

to make a loan or a transfer of funds. I never intended to. Nor do 

I think I said anything that could have been construed to do that. 

Chairman NEUGEBAUER. I now yield to the ranking member of 

the subcommittee. And after the ranking member’s questions, we 

will recess for votes. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Mr. Corzine, I am going to take you at your word that you never 

gave instructions to misuse customer money, because again, that 

would be somebody else who makes that decision, whether that is 

accurate or not. But I am going to take you at your word. My concern is exactly, how did you get to 40 to 1 leverage in the first 

place? Whose money was it? 

Mr. CORZINE. As I think I have conveyed in my written testimony, we were bringing down the leverage. 

Mr. CAPUANO. But how did you get to 40 to 1? 

Mr. CORZINE. First of all, that was the number we were at before 

I joined MF Global. And I think, as you will see if you look at the 

reporting on the quarterly filings, we were closer to 30 to 1 or even 

sometimes in the 20s. 

Mr. CAPUANO. I know where you were, and I know you were coming down, but you were still in the 30 to 1 ratio when you left the 

firm as well. Whose money was it? Somebody had to loan this 

money to you. 

Mr. CORZINE. There were many— 

Mr. CAPUANO. Or to your predecessors. 

Mr. CORZINE. There are many different ways that a firm goes 

about financing itself. Probably the most important element with 

regard to how those kinds of leverage numbers can be produced is 

through repurchase agreements. 

Mr. CAPUANO. There we go. In-house repos for the most part. Is 

that accurate? 

Mr. CORZINE. More of it was likely done with repurchase agreements from the broker-dealer side of the firm with clients, where 

proprietary positions that the firm had— 

16 

Mr. CAPUANO. Repos to maturity? 

Mr. CORZINE. Not repos to maturity, repos of inventory positions 

that the firm— 

Mr. CAPUANO. But even for a repo, I guess what I am getting at, 

as I understand, and this really is not just MF Global, as I understand it, under the rules of the CFTC a week ago, or 2 weeks ago, 

whatever it was, everybody talks about segregated funds, that 

somehow the customers’ money is locked away never to be touched. 

Yet under the CFTC rules, for 10 years, or 81⁄2 years, that is not 

true. 

For all intents and purposes, as long as you went through a few 

steps and put a piece of paper on the books that said, ‘‘I promise 

I will pay you back, and here is the piece of collateral that I claim 

to be right,’’ you actually could legally, under recently passed rules, 

basically invade those funds of customers and not break any rules 

doing so. Is that an unfair statement? 

Mr. CORZINE. It is not an unfair statement. 

Mr. CAPUANO. That is what I wanted to know. 

Mr. CORZINE. I would say that— 

Mr. CAPUANO. I am not suggesting that you were doing anything 

other than what everybody else was doing. 

Mr. CORZINE. Rule 1.25 set out by the CFTC designates or identifies specific securities— 

Mr. CAPUANO. And that is what I am suggesting. You were doing 

exactly what 1.25 said you could do. I am not blaming you for that. 

The rules said you could do it. But by doing that, I guess the next 

question is, okay, you do a repo, you move customer money out, 

perfectly legally under then current rules. And then, as I understand it, you moved that money to the U.K. And the U.K. would 

then put it on the street for additional repurchase. Now, again, I 

am kind of jumping around here because I am trying to follow this 

as everybody else. And I am not suggesting up until this point that 

anything wrong or illegal or against the rules was done. Is that a 

fair way to put this? 

Mr. CORZINE. I would be speculating if I tried to say that money 

produced by repo, legitimate 1.25 collateral was moved to London. 

It could very well have just been the financing vehicle for the securities themselves. 

Mr. CAPUANO. It is my understanding the reason it would be 

moved to London, and again, I want to be very clear—I am not suggesting you did anything different than anyone else, which I am 

going to get to in a minute, that it goes to London because the 

rules in England are significantly different than here. You were allowed to take larger risk. You were allowed to do different things 

with those repos. 

Mr. CORZINE. To the best of my recollection, that is not what we 

were doing. 

Mr. CAPUANO. That is not what you were doing. But I guess, let 

me ask it another way then. To the best of your knowledge, were 

you doing anything differently than most people in your business 

were doing? 

Mr. CORZINE. Congressman, that is a very broad question. We 

clearly had repos to maturity in our broker-dealer on European 

sovereigns that seemed to be different than some of the other 

17 

firms. But the kind of repo financing, general repo financing, match 

books, are relatively common— 

Mr. CAPUANO. Relatively common. Bingo. Hence the problem. 

And by the way, am I wrong to think that the CFTC, for all intents 

and purposes, has just shut down this relatively common approach 

towards borrowing customers’ money? 

Mr. CORZINE. Congressman, I believe they have narrowed the 

available assets— 

Mr. CAPUANO. So that you can’t use foreign debts and you can’t 

use in-house— 

Mr. CORZINE. You were not able to use foreign debt before, unless 

there were deposits of foreign currencies— 

Mr. CAPUANO. One of the reasons why the money would be 

moved offshore because those rules are different there. So I guess 

what I am trying to get at, as I said earlier, if you did anything 

wrong, the criminal investigators will find that, I won’t. I am trying to find out, and my concern is the things that you were doing, 

that is, you by your own statement said nobody intended to misuse 

anything, again, I am taking you at your word on that, the things 

you were doing are relatively common in the industry. The 30-to1 ratio is relatively common in the industry. The regulators didn’t 

find a serious problem with it, just a little bit of a problem. 

You are talking more than $6 billion, $16 to $17 billion of exposure there, and the regulators told you to put $200 million, a mere 

pittance. So you were doing at the time, at least as I read it, pretty 

much what everybody else was doing. I guess my question is— 

which I know you won’t be able to answer—who else was doing 

this? And how much is at stake? Because if it happened to you and 

you did nothing wrong, then it could happen to anyone tomorrow, 

and maybe up until this point, they are not doing anything wrong. 

And that is the problem to me. I am less interested in one company, though, again, you have customers who were seriously hurt, 

than I am in the system, and whether there is a systemic risk. And 

if one company does it, that may not be a systemic risk. But if everyone is doing it, and the regulators allow it, and the people who 

are enforcing those regulators think it is normal, the credit rating 

agencies think it is normal, the accountants come up with rules to 

be able to have a loan basically booked as a sale, that opens up this 

whole thing to a massive mess. And by the way, the company that 

you were looking at to buy your company at the end, aren’t they 

deeply involved in the same types of activities? 

Mr. CORZINE. Sir, I could not respond to that. I don’t know their 

balance sheet. 

Mr. CAPUANO. So you were going to sell the company to a company you didn’t know anything about? 

Mr. CORZINE. There would be a period of due diligence after 

there was an agreement if it were a standard merger agreement. 

Mr. CAPUANO. I think my time has expired. 

Thank you, Mr. Corzine. 

Chairman NEUGEBAUER. Thank you. 

And now, the committee will recess until the votes are over. And 

we will reconvene probably in about 30 minutes. 

[recess] 

18 

Chairman NEUGEBAUER. The committee will come back to order. 

Some people thought this might be somewhat of a heated session, 

and it has turned out to be very hot in here. We apologize for that, 

but we have some folks hopefully working on the air conditioning 

or the temperature as well. 

We will now resume the question-and-answer period. The vice 

chairman of the subcommittee, Mr. Fitzpatrick, is recognized for 5 

minutes. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

Mr Corzine, we asked the Federal Reserve Bank of New York 

whether you had ever called them to talk about MF Global, and 

they reported that there were a number of calls made during the 

week of October 24, 2011. For instance, on October 26th, you made 

two calls to the New York Federal Reserve Bank and spoke with 

a Mr. Dudley. 

On October 27th, you made five calls to the New York Fed and 

discussed the situation of MF Global with Mr. Dudley. And on the 

28th, there were more calls to the New York Fed. 

What was the substance, or what came up during those conversations? What was the purpose of making the calls? 

Mr. CORZINE. Congressman, first of all, I was called by Mr. Dudley, I think, preceding that first series of calls that you identified, 

to keep the Federal Reserve posted on how we saw our liquidity position, how our clients were reacting to us, and what other steps 

we were taking, given the stress that was being exhibited in the 

marketplace. 

Mr. FITZPATRICK. So you identify stress in the marketplace, is it 

safe to assume that, at that point in time, you were discussing that 

MF Global was in trouble? 

Mr. CORZINE. We weren’t discussing that we were in trouble. We 

were discussing how we were managing our liquidity position and 

what kinds of steps we were taking in that context. 

Mr. FITZPATRICK. Was MF Global in trouble at that point? 

Mr. CORZINE. In my view, we were having stressful conditions in 

the market, but I thought we were going to be able to manage 

those. 

Mr. FITZPATRICK. On October 24th, your assistant controller 

called the Chicago Mercantile Exchange and told CME that MF 

Global was in trouble, that you were going to be downgraded and 

that you were going to report losses. 

There is a press release—I think it is dated October 25th, and 

it may be on the screens in front of the Members—about your second quarter earnings. And in that press report, you said, ‘‘Over the 

course of the past year, we have seen opportunities in short-dated 

European sovereign credit markets and built a fully financed letter 

of maturity portfolio that we actively manage. We remain confident 

that we have the resources and expertise to continue to successfully manage these exposures to what we believe will be a positive 

conclusion in December of 2012.’’ 

So my question, Mr. Corzine, is, why do you make a public statement about your confidence that MF Global has ‘‘the resources and 

expertise to continue to successfully manage that situation,’’ when 

your company previously told the CME that you were going to be 

downgraded, and when the very next day, you were in frequent 

19 

communication with the New York Fed about MF Global’s position 

as a going concern? 

Mr. CORZINE. Congressman, the conversations with the New 

York Fed were stimulated by a call from them to us to keep them 

posted. So that would not have been in contemplation of this statement. 

And while a downgrade is not comforting news for an organization, it is not indicative that we were approaching bankruptcy or 

that we were in the kind of stress that I think one would have described the situation on by Friday. 

Mr. FITZPATRICK. Your company, in fact, filed a Chapter 11 bankruptcy on October 31st, 6 days later, correct? 

Mr. CORZINE. That is true, sir. 

Mr. FITZPATRICK. Your own securities filings are clear that downgrades are a huge risk factor and would lead to margin calls and 

liquidity problems for the organization. And yet, knowing that you 

were going to be downgraded, you still made a public statement to 

the effect that all is well. 

Why did you do this, and how can you reconcile private remarks 

about trouble at MF Global with your public statements on October 

25th? 

Mr. CORZINE. Sir, I think the statement you are giving to me to 

review deals specifically with the repo-to-maturity portfolio and 

that we would be able to manage that, and we thought we had the 

capacity, including the morning of the 25th, we were actually liquidating some of those RTM positions. 

Mr. FITZPATRICK. But you thought, on the 25th, you could manage successfully to a successful conclusion in December 2012, and 

6 days later, you filed for Chapter 11 bankruptcy? 

Mr. CORZINE. We thought we would have to take adjustments to 

deal with the realities of the downgrade and the potential reactions 

of the marketplace, but that was what we were alluding to. We had 

the capacity to manage that. We thought we did. 

Mr. FITZPATRICK. So when was the first time the potential of a 

Chapter 11 bankruptcy was discussed with the board at MF Global? Was it before October 25th? 

Mr. CORZINE. To my recollection, there was no discussion of 

bankruptcy before October 25th. 

Mr. FITZPATRICK. Okay, I have nothing further. 

Thank you. 

Chairman NEUGEBAUER. Mr. Baca is recognized for 5 minutes. 

Mr. BACA. Thank you very much. Mr. Corzine, we all want to 

make sure that someone didn’t have an early Christmas, and we 

want to find out where this money went, especially $1.2 billion, 

where it has gone. 

You said that you had internal and external controls in place to 

ensure the security of the customer funds. Can you elaborate on 

the functions of these controls? 

Mr. CORZINE. There are arrangements, Congressman, in our 

Treasury operations area which have, to the best of my knowledge, 

thresholds of how money can move, size of amounts of money that 

can move. There are cross checks with Treasury functions that are 

responsible for making sure liquidity is in place. 

20 

So all of those, starting with the CFO, global level, moving to a 

global treasurer, to regional organizational structures where money 

could move, all of those had checks and balances in them to the extent that any of the respective internal audits and external audits 

and reviews of those procedures were in place. I had reason to believe the people, the policies and procedures would work. 

Mr. BACA. Thank you. 

Were any of these controls approved or signed on by any of your 

regulators? 

Mr. CORZINE. I would have to actually have that question answered by the regulators. We know that we are subject to their 

periodic review and all of the various venues and self-regulatory organizations and others periodically check the policies and procedures and the actions. 

And to my knowledge, at least up until that evening of October 

30th, I am not aware of where we had major challenges to that by 

the regulators. 

Mr. BACA. Maybe we need to find out. But to your knowledge, is 

there a common control that other firms have in place? 

Mr. CORZINE. Congressman, I am not familiar with other firms, 

and actually, some of the day-to-day specifics is not my experience, 

and detailed knowledge even of our own organization, other than 

the kind of description that I tried to give to you. 

Mr. BACA. Okay, to your knowledge, were your counter partners 

engaging in the same purchase agreement with other entities similar to MF Global? 

Mr. CORZINE. As I responded to the ranking member’s question, 

I think repurchase agreements, broadly spoken, are fairly common. 

Repurchase agreements to maturity are relatively common for U.S. 

Treasury securities, agencies, and corporates, although I don’t have 

specific knowledge about what other companies have. I think the 

repo-to-maturity concept applied to Euro sovereigns is somewhat 

different. 

Mr. BACA. Okay. In your opinion, had MF Global not run into the 

problems it did, would this level of finance and participation have 

continued, or would there have been changes in regulations, criteria or procedures to make sure that hopefully we didn’t have this. 

You didn’t have a crystal ball, but if we had a crystal ball, you 

probably would have changed everything, is that correct? 

Mr. CORZINE. Not unlike what I responded to Congressman Fitzgerald. We were adjusting our positions given the changing perspectives that credit agencies were bringing and the availability of 

credit. 

And so we would have, we were adjusting our balance sheet and 

our off-balance-sheet items to produce greater liquidity and less exposure to liquidity calls, if you would, post the downgrade. 

Mr. BACA. Okay, thank you, I know that my time is running out, 

so I appreciate your response, thanks. 

I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

The gentleman from New York, Mr. King, is recognized for 5 

minutes. 

Mr. KING. Thank you, Mr. Chairman. 

21 

Senator Corzine, as I mentioned earlier, this is really your world, 

not ours. And if you could just go through this with me. 

When you came to MF Global, you pretty much dramatically or 

intended to dramatically change its business model, make it more 

like Goldman Sachs, which would inherently involve more risk, 

which there is nothing wrong with, per se, but because of the increased risk, what new compliance procedures did you put in place 

when you came to MF Global, and can you tell me how many personnel that involved, what the cost was, and how closely you followed the implementation of those new compliance procedures? 

Mr. CORZINE. Congressman, first, I would say that I was not trying to recreate Goldman Sachs, although we wanted to be a brokerdealer. 

Mr. KING. But more like Goldman Sachs than what MF Global 

traditionally had been. 

Mr. CORZINE. It was clear, and I think I have tried to outline 

that in quite some detail in my written statement that we wanted 

to be in principal broker dealing activities to serve clients, and that 

there was some proprietary element that we would take that typically hadn’t been done before, that is true. 

And it is actually in that area that the biggest issue, I think, developed over a course of time with the initial chief risk officer because the experience of that individual had been more on the commodities side of the business, or the FCM customer credit area, a 

concern not only of myself but of the board. And we wanted to look 

for someone and did a search, a personnel search, to try to find 

someone who could bring the kind of experience. 

Mr. KING. But if you are changing the business model to any extent, doesn’t it require more than just getting a new risk officer? 

Did you put procedures in place yourself? Did you have any frame 

of reference to yourself as to what you wanted in place and how 

that would be done? 

Mr. CORZINE. We had to have different compliance supervision. 

We expanded our compliance positions. We actually had some serious concerns. 

Mr. KING. Can you tell me how many? 

Mr. CORZINE. Clearly, we had concerns in Asia. 

Mr. KING. Concerns—you said you brought in new personnel, I 

think. 

Mr. CORZINE. We brought new personnel to bear on our compliance functions. 

Mr. KING. Is that hiring new people? 

Mr. CORZINE. New people. 

Mr. KING. Do you have any idea what the number is? 

Mr. CORZINE. I will have trouble giving you the exact statistics 

because I don’t—it was numbers, and as I said in my oral remark, 

there were dozens and dozens of people dedicated to this. We made 

changes, upgraded. 

We also installed a new technology— 

Mr. KING. But you can’t say, you can’t say whether it was dozens 

and dozens of new personnel or just reprogram of old personnel? 

Mr. CORZINE. No, no, there were new people added. 

Mr. KING. Do you have any idea what that cost was? 

22 

Mr. CORZINE. Congressman, without being able to look at my 

records, I would be speculating. 

Mr. KING. Okay, you testified you first became aware of the missing customer funds on October 30th, the day before MF Global declared bankruptcy. Now had MF Global not been in the middle of 

trying to sell itself to another commodities broker, when do you 

think, as CEO, you would have become aware of the missing funds? 

Mr. CORZINE. Congressman, we are on premises basically 24/7 for 

the previous few days, so I probably, as soon as anyone had known 

that, it would have been elevated because all of this or most of 

this— 

Mr. KING. But if this crisis had not come about, would you have 

known—if the crisis did not become as critical as it did, would you 

have any knowledge at all of the funds— 

Mr. CORZINE. In the normal course of events, I probably would 

have been informed early on the morning of the 31st. 

Mr. KING. Okay. You have repeatedly said that you don’t know 

where the missing funds are. If I were a lawyer in a civil case, and 

I was trying to recover those funds for a client, and I hired you as 

an expert witness, what would your expert testimony be as to 

where you think those funds would be, based on your years of experience in the business? 

Mr. CORZINE. Congressman, I have tried to lay out in my written 

testimony some places where I would look, where movements of 

money in large positions had moved, I think I cited $1.3 billion— 

Mr. KING. Between October 30th and now, you have not been 

able to narrow it down at all? 

Mr. CORZINE. Congressman, I have not had access to any records. 

I have made testimony to what I think I would have at least considered, but I don’t have any specific knowledge and I— 

Mr. KING. My time has expired. Basically, I was going to say, 

just based on the knowledge you had, if you could have somehow 

used, the use of expertise and your experience at MF Global, to 

somehow deduce where the funds may be. 

With that, I yield back. My time has expired. 

Chairman NEUGEBAUER. I thank the gentleman. 

With that, Mr. Miller is recognized for 5 minutes. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

The transaction that seems to have caused all the trouble was 

the $6.3 billion purchase of European sovereign debt that was purchased through the repo market or financed through the repo market, is that correct? 

Mr. CORZINE. The European sovereign position was? 

Mr. MILLER OF NORTH CAROLINA. Yes. 

Mr. CORZINE. Financed to maturity through repurchase. 

Mr. MILLER OF NORTH CAROLINA. But it was purchased through 

the repo market, the repo— 

Mr. CORZINE. The original sovereigns’ position, the underlying 

debt of those particular sovereigns, was purchased in the market, 

and there was a repurchase agreement arrived at roughly the same 

time as the purchase of the underlying securities, and they were 

put together. So repo to maturity. 

Mr. MILLER OF NORTH CAROLINA. Under the securities, the securities were their own collateral, is that correct? 

23 

Mr. CORZINE. The securities were collateral for the repurchase 

agreement. 

Mr. MILLER OF NORTH CAROLINA. Were there any client assets 

used as collateral for that purchase? 

Mr. CORZINE. To my knowledge, none. 

Mr. MILLER OF NORTH CAROLINA. The amount of the transaction 

was 5 times your book value, but all of the security was actually 

from the sovereign debt that you were purchasing through the repo 

market? 

Mr. CORZINE. There are initial margin requirements for financing. 

Mr. MILLER OF NORTH CAROLINA. Right. 

Mr. CORZINE. And then variation margin periodically that you 

have to put up— 

Mr. MILLER OF NORTH CAROLINA. Okay. Your client contracts do 

allow you to use client assets as collateral to purchase securities 

for your own account, though, that is right, isn’t it? 

Mr. CORZINE. Very specific kinds of securities. That is what Rule 

1.25, Congressman specifies. European sovereigns, except in those 

cases where there are deposits of European currencies, are— 

Mr. MILLER OF NORTH CAROLINA. Okay. In the last 2 weeks, the 

last month before MF Global’s bankruptcy, did you pledge any client assets as security for any lending to MF Global? 

Mr. CORZINE. Could I ask you to repeat the question? I apologize. 

Mr. MILLER OF NORTH CAROLINA. In the last days of MF Global’s 

existence before bankruptcy, did you use any client assets as collateral for any purchases of securities or any loans to MF Global? 

Mr. CORZINE. Congressman, on an ongoing basis, you would use 

client funds for 1.25 eligible securities, yes. 

Mr. MILLER OF NORTH CAROLINA. Okay, were any—let me ask 

the other side, then, I think Mr. Capuano’s question got at this, did 

you borrow money from client funds using repo transactions? 

Where client funds had cash, did you use repo transactions to 

put— 

Mr. CORZINE. Over the normal course of business, securities that 

qualified as 1.25 eligible could be financed with those client funds, 

but there are very strict rules on that, and we observed those. 

Mr. MILLER OF NORTH CAROLINA. Okay, were any assets that 

were pledged as collateral liquidated? 

Mr. CORZINE. Taken in the last days, this is one of the reasons 

I responded to Congressman King’s question, we sold $1.3 billion 

worth of commercial paper, which was 1.25 eligible, and I certainly—I am not trying to answer his question while I am answering yours—but as those were liquidated, that money should have 

been put back into segregated accounts, and that would be one of 

those places that I would look very carefully. 

Mr. MILLER OF NORTH CAROLINA. Were any of the assets that 

you used for repo transactions with your own clients, as allowed by 

the CFTC rule, assets that you had as collateral for other transactions with another party? 

Mr. CORZINE. To my recollection, I can’t think of any. 

Mr. MILLER OF NORTH CAROLINA. Mr. Abelow, can you? 

24 

Mr. ABELOW. Congressman, the daily activity of funding the firm 

was not something that fell under my control, and so I am not intimately familiar with those structures. 

Mr. MILLER OF NORTH CAROLINA. Were any, I am sorry, were 

any of the assets that were in client accounts as part of repo transactions liquidated, taken as collateral by anybody? 

Mr. CORZINE. To the best of my recollection, any of those kinds 

of transactions were done according to the rules as we would have 

known them, and there was a whole set of people, policies, and procedures on how that should have been executed. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from New Mexico, Mr. Pearce, is recognized for 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. 

Thank you, Mr. Corzine, and Mr. Abelow. 

I am fascinated about the continuing response that, ‘‘Day to day 

is not my responsibility. It is not my experience.’’ 

In 2003, you offered an amendment to Defense Appropriations to 

hold the Bush Administration accountable, with a comment that 

the credibility gets weakened each day we fail to have a full accounting of the facts about what happened, facts such as who knew 

what, that certain information was false. When did they know it? 

Why was it expunged from one Administration’s speech and not the 

other. 

And then we hear today, ‘‘Oh, I am sorry, I didn’t know about 

the $117 million loan. I didn’t know about the window dressing, 

seven quarters consecutively, five in my time.’’ 

You have a question—window dressing, in a Wall Street Journal 

article, it says that you just lowered debt right before the reporting 

period and then you bounce it back up right after so that it looks 

better. It is not technically illegal, but it sure looks better. It is 

misleading, but it looks better, and it is not your day-to-day experience. 

Where did you spend the last—what hotel are you at here in the 

city? 

Mr. CORZINE. The Ritz-Carlton. 

Mr. PEARCE. At the Ritz-Carlton, did I hear that correctly? 

Mr. CORZINE. Yes, sir. 

Mr. PEARCE. How many of the 36,000 clients who were defrauded 

have you called personally? One? 

Mr. CORZINE. None. I have called none. 

Mr. PEARCE. Mr. Abelow, have you called anyone? I see both of 

you have real anxiety and sorrow, sadness, I think is the word, for 

the people who were hurt. We have a guy coming in here, with a 

$600 million net worth. Have you created a scholarship for any of 

the families who have been disadvantaged? Just to help them out 

with maybe their college funds? Yes or no? 

Mr. CORZINE. Congressman, the answer is no. 

Mr. PEARCE. I am sorry? 

Mr. CORZINE. The answer is no. 

Mr. PEARCE. No. 

Mr. Abelow? 

Mr. ABELOW. No, sir. 

25 

Mr. PEARCE. ‘‘But we are so sorry. We are desperately sorry. We 

want to apologize, at the beginning and end of the transaction.’’ 

Mr. Corzine, you said that there were no warning signs, and yet, 

I have three warning signs here from Mr. Roseman, saying that we 

were pretty concerned. He even took his concerns to the board of 

directors, did you not—I know it wasn’t your day-to-day responsibility, but did you ever communicate with the board of directors? 

Did they tell you, Mr. Roseman, the risk manager, came and said, 

whoa, we are doing some things that kind of frighten me? 

In fact, the testimony that other people have brought was that 

Mr. Roseman may have left the company under duress. Yes, he left 

voluntarily, and he was replaced by a guy who also, as risk manager, was raising questions about what was going on, and yet I 

think I heard you say that you had never heard any questions 

about anything that was going on at the company from internal 

sources. 

Mr. CORZINE. Congressman, I don’t think I said that with respect 

to risk management— 

Mr. PEARCE. So you were aware? You were aware Mr. Roseman 

was deeply concerned with risk management things, and you didn’t 

have to go through standard risk management practices. You could 

go straight to the board and you could buy and sell in your client, 

in your portfolio, without going through risk management, one of 

the basic things of internal controls. 

Mr. CORZINE. Congressman, risk limits were set at the board. 

The risk manager observed those and where we stood relative to 

those and would have reported to the board if we broke those limits. 

Mr. PEARCE. The risk manager was right on those concerns, and 

somebody else was wrong. Who made the decision that you were 

not going to concern yourselves with the risk manager’s concerns 

about where you stood? 

Mr. CORZINE. No one was uninterested or wasn’t willing to listen 

to the risk manager present his case to the board. 

Mr. PEARCE. No, I didn’t say no one is disinterested; they just ignored his advice. 

We have ‘‘rainmaker,’’ I hear the term ‘‘rainmaker’’ used a lot in 

your presence. We have rainmakers out in the dusty, barren sand 

hills of New Mexico. They drive around in pickup trucks with 55- 

gallon drums brought out of the oil field, cleaned up. Pour a few 

chemicals in, light them up, create rain. It is not much different 

than what they do on Wall Street. 

Thank you, sir. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from Florida, Mr. Posey, is recognized 

for 5 minutes. 

Mr. POSEY. Thank you, Mr. Chairman. 

Mr. Corzine, who advised you that the transfers were legal? 

Mr. CORZINE. The overdrafts that I addressed on Friday, as I put 

in my oral statement, I directed my inquiry to whether they were 

proper to senior people back in our Chicago office. 

Mr. POSEY. Would that be Laurie Ferber? 

Mr. CORZINE. Ultimately, Laurie Ferber was aware that we had 

questions about this, and I referred that also to her, she is our genVerDate Nov 24 2008 18:25 Jul 16, 2012 Jkt 072635 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\72635.TXT TERRIE
26 

eral counsel. But the assurance that I received was from our back 

office people in Chicago. 

Mr. POSEY. Can you give me a couple of names? 

Mr. CORZINE. The woman that I spoke to was a Ms. Edith 

O’Brien. 

Mr. POSEY. But Laurie Ferber agreed it was legal, too? 

Mr. CORZINE. Ms. Ferber was looking at the letter that was requested by JPMorgan to ensure that we were CFTC-compliant. 

Mr. POSEY. And she said you were? 

Mr. CORZINE. Once I submitted the letter that I was supposed to 

sign, I did not hear back from Ms. Ferber. As I suggested in my 

opening remarks, I had explicit statements that we were using 

proper funds, both orally and in writing, to the best of my knowledge. Since I don’t have all my records, I don’t have that, but I believe I have it in writing. And I conveyed that to JPMorgan. And 

JPMorgan asked later, at a later period of time, for confirmation 

that we were using CFTC compliant funds, and that is when I 

spoke with Ms. Ferber. 

Mr. POSEY. And what was her response? 

Mr. CORZINE. She took the issue, and was reviewing the letter, 

and I never heard anything back about it. 

Mr. POSEY. So you asked if it was legal to do this, and she never 

answered you? 

Mr. CORZINE. I had confirmation from the people that we relied 

upon— 

Mr. POSEY. Back office people. 

Mr. CORZINE. People in the Treasury function that we relied 

upon. 

Mr. POSEY. Okay. Have any of your assets or your passport been 

frozen? 

Mr. CORZINE. No, sir. 

Mr. POSEY. Do you agree with the assertion of the Wall Street 

Journal that JPMorgan Chase and Soros benefited from the fall of 

MF Global? 

Mr. CORZINE. I only read the article, and I have no idea. 

Mr. POSEY. You have no idea? 

Mr. CORZINE. No. 

Mr. POSEY. Did you sell them stuff? Do they generally make 

money when you sell them stuff or they broker stuff for you? 

Mr. CORZINE. I was not involved in those sales. 

Mr. POSEY. Okay. Do you think there is anything in Dodd-Frank 

that would have prevented this? 

Mr. CORZINE. I am really not in a position to speculate about 

that. 

Mr. POSEY. Do you have an opinion, just a personal opinion? I 

am just curious. We have heard a lot of talk here. If we had had 

Dodd-Frank, this would have never happened, and I don’t see it. 

I just wonder if you saw anything in Dodd-Frank that would have 

stopped this from happening? This is bad behavior. Somebody basically stole essentially out of an escrow account. You can have all 

the regulation in the world if somebody is going to steal somebody 

else’s money—but unless the regulators catch you, if they get off 

their bus and do their job and catch you, it is not going to make 

any difference. 

27 

The only way this bad behavior, I am getting on another subject, 

but this is going to be changed by putting people in prison eventually. 

Mr. Abelow, are you still employed by MF Global? 

Mr. ABELOW. I am employed by MF Global Holdings, the holding 

company, not MF Global Inc., the entity in which—the regulated 

entity. 

Mr. POSEY. Were you ever employed by the regulated entity? 

Mr. ABELOW. I was employed by MF Global Holdings, of which 

the regulated entity was a subsidiary. 

Mr. POSEY. So is that a yes? 

Mr. ABELOW. I believe that I was employed by MF Global Holdings as a technical matter. That is who I got my paycheck from, 

sir. 

Mr. POSEY. What do you think should be done differently? If we 

could roll back the clock, what do you think could be done differently that would prohibit this from happening? 

Mr. ABELOW. Congressman, I am waiting to see the results of the 

investigation, and I assume that when we do and when you do, 

that you, together with regulators, will be better informed and able 

to take a view as to what can be done. 

At the moment, absent the information as to what happened, I 

am not sure how to answer the question. 

Mr. POSEY. Mr. Corzine, same question. 

Mr. CORZINE. I think this will be fact-dependent, Congressman. 

Mr. POSEY. Thank you. 

My time has expired. Thank you, Mr. Chairman. 

Mr. Chairman, I yield back. My time has expired. 

Chairman NEUGEBAUER. Thank you, just a quick follow up. 

Mr. Corzine, did you say you signed the letter for JPMorgan before it was verified that those funds were, and you just told them 

to go check it out? 

Mr. CORZINE. Mr. Chairman, I did not sign the letter. 

Chairman NEUGEBAUER. Okay, thank you. 

I now recognize the gentleman from Ohio, Mr. Renacci, for 5 

minutes. 

Mr. RENACCI. Thank you, Mr. Chairman. 

Mr. Corzine, MF Global had a history of compliance, failures, internal control problems, incomplete disclosures. With all of that, 

when you took over, did you make any effort to look at enhancing 

internal controls in the company? 

Mr. CORZINE. As I responded, I think, to Mr. King or Congressman King, we had broadened out our compliance activities. We 

brought in consultants. 

Mr. RENACCI. So you were trying to enhance internal controls? 

Mr. CORZINE. Yes. 

Mr. RENACCI. So you do understand internal controls? 

Mr. CORZINE. As a CEO, you have to sign the Sarbanes-Oxley 

verification that you have policies and procedures and people in 

place. 

Mr. RENACCI. And you have to understand internal controls to 

sign that; correct? 

Mr. CORZINE. You have to have the assurance that you can rely 

on those things that happen. 

28 

Mr. RENACCI. Right. 

Mr. CORZINE. And you need to be able to have those tested by 

auditors and others. 

Mr. RENACCI. I agree, so you have to be able to understand it to 

sign it; otherwise, you wouldn’t be able to sign that, correct? 

Mr. CORZINE. You do, but you can’t be as detailed, as experienced 

and in the execution of that as someone who might have a specialty 

on some of those areas. 

Mr. RENACCI. I understand. As part of your internal control procedures, who made the decision to allow you complete authority 

over trades which only the board of directors could block? That is 

a pretty significant internal control issue. 

Mr. CORZINE. Any of the trades that I think you are speaking to, 

the European sovereign trades that were repo-ed to maturity, were 

in the context of limits established after debate and discussion at 

the boards. 

Mr. RENACCI. But you do agree the board was the only one, the 

board of which you were chairman, was the only one, the group 

that could block your trades? 

Mr. CORZINE. They certainly could have blocked them up to the 

limits unless we got authority to go beyond those limits, which we 

did. 

Mr. RENACCI. But they were the only ones that could block it, yes 

or no? There was nobody in the company who could block those 

trades. The board could block them. 

Mr. CORZINE. The board could block them, yes, sir. 

Mr. RENACCI. Right. So no matter what anybody said below 

that—and I go back to Mr. Pearce’s questions for you, Mr. Roseman 

raised serious concerns. Mr. Stockman raised serious concerns— 

and it is another interesting thing on internal controls, when Mr. 

Stockman took over, someone took away his authority to determine 

the liquidated risks of trade you were making. Who did that, was 

that you, or was that the board, or was that the board based on 

your recommendation? 

Mr. CORZINE. Congressman, I am not aware of anyone taking 

away authority from Mr. Stockman and, in fact, I would think that 

we broadened his authorities. 

Mr. RENACCI. But clearly, he had no authority to stop you from 

making trades because everything rolled back up to the board. He 

could, when he went to the board, they didn’t really, it was up to 

the board to stop you from making some of these trades? 

Mr. CORZINE. Mr. Stockman, like Mr. Roseman, had access to the 

board, reported to the board, could have and did have individual 

meetings with the board members, and had full ability to state his 

position, his concerns, his comfort. 

Mr. RENACCI. Comfort, right. Of course, you were chairman of 

the board, so I think I read somewhere at one point in time, you 

told the board you were considering leaving because they were just 

coming down on— 

Mr. CORZINE. Congressman, to my recollection, that is not the 

fact. 

Mr. RENACCI. Okay. You indicated earlier that these types of situations were consistent with other companies similar, and would 

you say that type of internal control was similar, that other compaVerDate Nov 24 2008 18:25 Jul 16, 2012 Jkt 072635 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\72635.TXT TERRIE
29 

nies similar, similar, would only have the board of directors be able 

to overrule them? Yes or no? 

Mr. CORZINE. Congressman, I don’t really want to speculate, and 

I don’t really know. 

Mr. RENACCI. Okay. We talked about the significance of internal 

controls of financial reporting given through the Sarbanes-Oxley 

certifications. Did you sign those on March 31st, June 30th, and 

September 30th? 

Mr. CORZINE. I signed them on, actually, I think the timeframe 

is later than that when the—- 

Mr. RENACCI. Right. 

Mr. CORZINE. When the auditors came back with— 

Mr. RENACCI. Did you believe that MF Global had sufficient internal controls over financial reporting given the breach of segregated funds that occurred subsequent to that? Did you believe 

that when you signed those? 

Mr. CORZINE. When I signed those agreements or those certifications, I believed we had the policy and procedures and people in 

place. And, as I have said, there are no significant notices, either 

from regulators or others, that I would notice with regard to those 

controls. 

Mr. RENACCI. So you believe that you were being truthful with 

your auditors when you signed the Sarbanes-Oxley certifications 

and assured investors and regulators of the adequacy of internal 

controls over financial reporting. You believed that when you 

signed them? 

Mr. CORZINE. Yes, sir. 

Mr. RENACCI. Thank you, my time is up. 

Chairman NEUGEBAUER. I thank the gentleman. And now the 

gentleman from Texas, Mr. Canseco. 

Mr. CANSECO. Thank you, Mr. Chairman. 

Thank you, Mr. Corzine, for being here. Back in July of 2002, 

while you were serving in the Senate, you made a statement regarding financial regulation, and you said, ‘‘We need real reform, 

and we need it now. We do not need the rhetoric. We need to be 

able to restore the confidence the American people want to see, 

move away from the era of Enron and WorldCom and get to an era 

where we have markets that are balanced and fair, where they 

have the checks and balances in them to give people the confidence 

that when they make an investment, that investment is what they 

thought. It is when they entered into it.’’ 

Unfortunately, the bill which you were then speaking in strong 

support of was the Sarbanes-Oxley bill, which has cost the private 

sector billions of dollars to comply with and is a direct cause of the 

lack of public offerings in recent years. 

Yet even with all the provisions of Sarbanes-Oxley, $1.2 billion 

of customer money could supposedly just vanish into thin air at MF 

Global. A lot of this money belongs to hardworking farmers and 

ranchers across the country who trusted MF Global and the customer segregation laws that have been in place for years. 

The farmers and ranchers whose assets are frozen, or lost, are 

no different than the rank and file workers at Enron who lost some 

or all of their retirement savings. They are all innocent victims of 

failed corporate management and failed regulation, and certainly, 

30 

the investments that customers made in MF Global aren’t what 

they thought they were. 

So, a question to you, you had specific responsibilities in your 

role as mandated by Sarbanes-Oxley law. Yet, according to your 

testimony, you seem to have made little or no effort to acquaint 

yourself with the firm’s primary business. Were you failing as a 

CEO to perform the due diligence as required by law? 

Mr. CORZINE. Congressman, we have a whole staff of individuals 

and checks that are performed to make sure that senior management has knowledge of deficiencies and elements of our control systems that would have been reported, not only to me, but to the 

audit committee before we would sign those Sarbanes-Oxley certifications. 

Mr. CANSECO. Let me ask you this, because I have limited time 

here. You as CEO have a responsibility to monitor the internal controls at MF Global. Who at the company was responsible for ensuring that customer accounts were segregated? 

Mr. CORZINE. There was a team of people in our Chicago office, 

led by the North American CFO and people on that staff who had 

the oversight of the functions of the segregated accounts. 

Mr. CANSECO. And you know who they are? 

Mr. CORZINE. I do. 

Mr. CANSECO. Let me move on a little bit here to a different line 

of questioning. MF Global’s Web site states, ‘‘MF Global is a well 

capitalized and diversified intermediary with a strong, conservatively managed balance sheet. We take measured principal risk to 

support client activity and offer financing to facilitate client transactions. Because of our financial strength and comprehensive risk 

management, clients can have confidence that they are trading 

with a strong counterparty.’’ 

So, please tell us, Mr. Corzine, in your own words, what the following terms mean. First, ‘‘well capitalized.’’ 

Mr. CORZINE. ‘‘Well capitalized’’ means that we were meeting our 

regulatory requirements, that we had capital that would allow us 

to believe that our positions were sustainable for the timeframe 

that we were to hold them. 

Mr. CANSECO. Second, ‘‘diversified intermediary.’’ 

Mr. CORZINE. ‘‘Diversified’’ would mean that we were in more 

than one business, that we had different ways that we could approach producing revenues. 

Mr. CANSECO. Third, ‘‘strong, conservatively managed balance 

sheet.’’ 

Mr. CORZINE. As you know, we were, or as I suggested in my 

written statement, that we were actively reducing the leverage, 

and we were in the midst of looking for a strategic sale or partnership with regard to our FCM so that it would come down even 

more dramatically. 

Mr. CANSECO. All right, and finally, ‘‘measured principal risk.’’ 

Mr. CORZINE. The measured principal risk has to do with how we 

look, how, generally, people are required to report their risk, its 

valuation at risk, and those numbers were really quite small by 

comparison of any of our competitors and didn’t grow under my 

watch. 

31 

Mr. CANSECO. All right. I see that my time is just about to expire, so let me ask you this, where were Sarbanes-Oxley and DoddFrank in preventing the collapse of MF Global? Could they have 

prevented it? 

Mr. CORZINE. I don’t know that I can answer that question, Congressman. 

Mr. CANSECO. Do you have an opinion? 

Mr. CORZINE. I believe that when you have internal controls, and 

they work the way they are supposed to, you have the right people, 

policies, and procedures in place, which we believe we did, they 

should have prevented the kind of problem that we had. 

Mr. CANSECO. So, obviously, Dodd-Frank and Sarbanes-Oxley 

couldn’t help you and couldn’t have helped MF Global survive. 

Thank you very much, and I yield back the balance of my time. 

Chairman NEUGEBAUER. I thank the gentleman, and now the 

gentleman from Colorado, Mr. Perlmutter, is recognized for 5 minutes. 

Mr. PERLMUTTER. Thanks, Mr. Chairman, and I guess that sort 

of gets to where I want to start. There is an old adage: Desperate 

people do desperate things, desperate companies do desperate 

things. 

So, in these final days, just some basic questions and maybe you 

have answered these, who were your top three secured creditors, 

say a week in advance of the bankruptcy? And I am asking both 

gentlemen. 

Mr. CORZINE. Secured creditors, probably JPMorgan, which ran 

a secured credit facility for us. 

Mr. PERLMUTTER. Okay. 

Mr. CORZINE. And there were a number of banks in that, most 

of the major financial institutions. 

Mr. PERLMUTTER. And did they cash their collateral in that last 

week? 

Mr. CORZINE. I have no knowledge on whether they did or they 

didn’t. They continued to allow us to fund against that secured facility. 

Mr. PERLMUTTER. I guess my question is, over the course of the 

last week, how did the company get so upside down? 

Mr. CORZINE. I think, as I have stated in my written testimony, 

the downgrade, the reported loss and the concern that was expressed by the rating agencies, in particular, with regard to this 

sovereign position created a fairly negative environment for investors and people who were making judgments about the company. 

Mr. PERLMUTTER. Look, there are going to be plenty of courts to 

look at this, from the bankruptcy court to who knows what else. 

So, I am with Mr. Capuano. I am trying to figure out, in times 

where there really is a run on the bank, where there really is desperation, ordinary protocols sometimes go out the door. 

Now, whether there needs to be a third party who holds the 

money in trust, kind of slows down the whole process in good 

times, but definitely slows it down in bad times, is that something 

that would have helped here to protect folks who seem to have lost 

their investment? 

Mr. CORZINE. If segregated accounts were held outside, it might 

have. I don’t want to speculate on that. The depositories now hold 

32 

some of the customer funds, and they are already held outside the 

firm. Some are; some aren’t. 

Mr. PERLMUTTER. Mr. Canseco’s questions, though, he was focusing on Sarbanes-Oxley, he was focusing on Dodd-Frank, we have 

the 33 Act, we have the 44 Act, we have all sorts of things, but 

the thing we don’t have is some specific requirement, in my opinion, and maybe I am wrong, that there be a segregated account. 

That may be too harsh on the system, and it won’t operate very 

efficiently, but in this instance, it would have potentially blocked 

or been a firewall to slow down the movement of the money. And 

so I am just trying to figure out, as Mr. Capuano was, how could 

we have prevented this, because in those last days it was, in your 

word, ‘‘chaotic.’’ 

Mr. CORZINE. Congressman, until the facts are peeled back on literally thousands of transactions, I am moving into a speculative 

forum, and I could be misleading. 

Mr. PERLMUTTER. Okay. Mr. Abelow, do you have any response 

to that, because we are here as legislators. I am not here to judge 

what happened. 

I am just trying to hear—a lot of people lost a lot of money and 

I am trying to figure out, is there a way that could be—we could 

deal with it in terms of the law to stop this from happening? 

Mr. ABELOW. Congressman, at the risk of repeating myself and 

the Governor, I think that we will, in the fullness of time, when 

we understand exactly what happened, we will be, you will be and 

the regulators will be better positioned to identify what additional 

safeguards, if any, would prevent whatever happened from happening again. 

Mr. PERLMUTTER. Okay. 

Thank you, I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentlewoman from New York, Ms. Hayworth, is recognized for 5 minutes. 

Dr. HAYWORTH. Governor Corzine, on page 18 of your written 

testimony, you state you were not an expert on the complicated 

rules and regulations governing the various operating businesses 

that comprise MF Global, that you had little experience or expertise in those operational aspects of the business. 

Now, on page 4, when you are describing your initial tenure at 

MF Global, you do say that you initiated, obviously, you had a strategic review with the Boston Consulting Group, very well respected, and you looked into obviously a range of businesses and 

determined that you would take MF Global from being a fairly 

stodgy 230-year-old brokerage firm and 3-to-5-year plan that you 

would ultimately convert it into an investment bank, which obviously carries more risk but more potential profitability, one presumes. That is why you would have done that, although I don’t 

mean to impute motives. 

But if it had remained simply a broker, obviously, presumably, 

we wouldn’t all be here. 

But I am just, you can understand the discrepancy, and you can 

understand from your, again—I have spoken with former colleagues of yours who have the highest respect for your gifts. It is 

hard to imagine. And we have found ourselves in this sort of situaVerDate Nov 24 2008 18:25 Jul 16, 2012 Jkt 072635 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\72635.TXT TERRIE
33 

tion, unfortunately, all too frequently in the recent past, where 

there is a highly talented man or woman who experiences or leads 

an organization that unfortunately comes to grief in one way or another, and then there is a contention of ignorance. 

So, I am wondering how we resolve those things, and how can 

any awareness in that way or any perception in that way help us 

to prevent this kind of event from happening in the future? 

Mr. CORZINE. It is a challenging question, Congresswoman. I believe that the vigorous application of the checks and balances that 

come from things like Sarbanes-Oxley’s review of internal controls 

are a positive ingredient to bring some sense of security to those 

that look at organizations externally, certainly give one a greater 

sense that the financial numbers are what they are supposed to be. 

It is absolutely essential that leaders within an organization set 

a culture that people attend to those terms and conditions of operating within the spirit and letter of the law. Until that evening, as 

it relates to customer funds, I believed we were doing that. 

Dr. HAYWORTH. Do you think, sir, that there might have been excessive deference toward your position given that you had had a 

rather stellar career, to say the least? 

Mr. CORZINE. Sometimes, the kind of career that I had had might 

not bring deference. 

Dr. HAYWORTH. I assume you are talking about the political side. 

Don’t forget your audience. 

Mr. CORZINE. But I leave it to your conclusion. It is a risk when 

someone new comes into an organization. 

Dr. HAYWORTH. I wonder, as I listen, because we try to come up 

with—the 111th Congress passed a massive law that was meant to 

try prevent tragedy, and yet we find ourselves at risk of suffocating 

the very mechanisms that create growth and jobs. 

And what I think we need is better tools that will allow the effective application of the laws that existed prior to Dodd-Frank. 

Would you say better tools might help us, better analytics? 

Mr. CORZINE. Better analytics always help. More information, 

more transparency, in my view, are positive, and certainly, better 

analytics are important. 

Dr. HAYWORTH. I yield back. 

Mr. Chairman, thank you. 

Chairman NEUGEBAUER. I thank the gentlewoman. 

And now, the gentleman from Tennessee, Mr. Fincher, is recognized for 5 minutes. 

Mr. FINCHER. Thank you, Mr. Chairman. 

Thank you, Senator, Governor for coming here today. 

I represent a very heavily agricultural district back in Tennessee. 

A lot of constituents had money tied up in MF Global, and they are 

calling me and asking me, what happened? What is going on? If 

you were a customer of MF Global—I have just a couple of statements, a couple of questions, and then I will let you comment. If 

you were a customer of MF Global, would you accept the story that 

you are telling that you simply don’t know where the funds are, 

that $1.2 billion is unaccounted for, and the CEO and the COO and 

the CFO of this firm simply don’t know where the money is and 

can’t help find it, because they quit and don’t have access to the 

34 

records? Should hardworking farmers and ranchers who have their 

money tied up accept this, and would you? 

Mr. CORZINE. If I were one of those customers, I would be very 

frustrated and angry. I would expect that we will get the answers 

to this as the multiple investigations that are looking at all of the 

facts lay those out. And people, according to what I have heard, 

have almost a 24/7 approach to those investigations. I am sure it 

is frustrating, but it needs to be resolved with facts, not speculation. 

Mr. FINCHER. Why did you resign? 

Mr. CORZINE. I was asked to resign by implication. 

Mr. FINCHER. You repeatedly state that you are unable to answer 

specific questions because you do not have access to the books. Why 

not help the investigators find this money? And can you point to 

any instances where you have assisted in the ongoing search for 

these funds after you left? 

Mr. CORZINE. I have not, other than my testimony, which I am 

sure has been reviewed. 

Mr. FINCHER. Who had the right to approve transfer of money 

between firm accounts? 

Mr. CORZINE. As I said in my testimony, it was in our Treasury 

function. And there are checks and balances on that. There are 

Treasury operations where people physically move securities and 

cash, and there are people who do the financing part, operate and 

interface with banks in the repurchase markets and other things. 

Mr. FINCHER. Would it be safe to say that maybe the reason, and 

just in layman’s terms, if you will, that you were just, MF Global 

was just shorting the market and couldn’t cover the margins, and 

that is why the money is gone? 

Mr. CORZINE. Congressman, to my recollection, on the evening of 

October 27th, there were substantial hundreds of millions of dollars 

in cash and free collateral that should have allowed us to meet 

margin calls. 

Mr. FINCHER. Do you think any laws have been broken here? 

Mr. CORZINE. Congressman, I would be speculating, because I 

don’t know the facts. And I think it is fact-dependent. 

Mr. ABELOW. I do not know, sir. I have not—I don’t have access 

to the ongoing investigations and what they have uncovered to 

date. 

Mr. FINCHER. It is just really, to commonsense business people, 

farmers who take risks—and I am a farmer—every day trying to 

deal with all sorts of variables, to have some stability and presence 

knowing that their capital is safe, and then to have these hearings—and I have watched the Senate and then the House Agriculture Committees, and then today—and it just, no answers, it is 

just beating around the bush so to speak, as we say back in Tennessee, no clarity, no one knows anything, everybody has done 

something, and it is really a shame. I am sure we will get to the 

bottom of it; someone will. But I hope no laws have been broken 

here, because this is really a disservice to a lot of American farmers. Thank you, gentlemen. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now, the gentleman from California, Mr. Royce, is recognized for 5 minutes. 

35 

Mr. ROYCE. Thank you. Mr. Corzine, you took the helm of MF 

Global in March of 2010. But a couple of months prior to that, you 

lobbied or argued before the New York Fed on behalf of MF Global, 

seeking to become a primary dealer. It has been noted that you believed that this status was a critical part in shifting MF Global toward a Goldman-like institution, a mini-Goldman, I think was the 

wording. Can you explain why that was the case? 

Mr. CORZINE. Congressman, I did join MF Global in the last few 

days of March of 2010. And I did not, previous to that time, meet 

with the Federal Reserve on MF Global or on any matter, or anyone else with regard to an MF Global matter. 

Mr. ROYCE. So the reports about joining the select club as primary dealers, you did not play a role in that, you did not envision 

that as an advantage and suggest that and try to—go ahead, sir. 

Mr. CORZINE. After I joined MF Global, I certainly continued the 

pursuit, which had actually begun I think as much as a year and 

a quarter before I had joined, believed that it was important for us 

in a development of our business. We were active market makers 

in U.S. Treasury and agency securities before I came to MF Global. 

It is part of my own history at some place I actually had expertise. 

And we certainly did not step back from seeking that recognition 

after I came. 

Mr. ROYCE. At the time of your approval as a primary dealer at 

MF Global, the institution had a weak credit rating, MF Global 

was bleeding cash, the losses in the prior year, I believe, were $137 

million. There was a history of compliance failure, at least 80 regulatory actions taken against it since 1997. Looking at that period 

in the spring of 2010, does it make sense to you that MF Global 

was approved to be a primary dealer by the New York Fed? 

Mr. CORZINE. Congressman, we were approved in, if I am not 

mistaken, in 2011, either January or February, I can’t remember 

the specific date. But it was a 2011 approval. 

Mr. ROYCE. Would you have approved an institution with those 

problems? 

Mr. CORZINE. I would have, as we did, make the case that we 

were a meaningful provider of liquidity to the underwriting of U.S. 

Treasury debt, that we were providing liquidity to our clients 

through the repurchase agreement markets, that we had insights 

because we were active in futures markets around the globe that 

could be important to the capital markets desk about what was 

happening in markets. 

Mr. ROYCE. At the same time, if you were in the shoes of the 

New York Fed, and you had been through Bear Stearns, leveraged 

at 30 to 1, if you had been through Lehman at 30 to 1, and arguably the leverage here of your firm was 40 to 1, I guess I am asking, do you think you got special treatment because of your connections in terms of this decision to give this designation to MF Global 

given some of the concerns out in the financial press about the institution? 

Mr. CORZINE. Congressman, I don’t believe we got special treatment. We never asked for special treatment. 

Mr. ROYCE. Then let me ask you about CFTC, because, as you 

know, Mr. Gensler has recused himself from the case because of 

your past relationship. Do you believe MF Global, specifically the 

36 

segregation of customer funds, was properly overseen by the 

CFTC? And do you believe that your firm might have been given 

special treatment because of your connection to Mr. Gensler, who 

has now recused himself? 

Mr. CORZINE. I do not believe we were given special treatment. 

And I need to understand as we—as I have communicated to the 

committee, that when we know the issues that caused this element, 

then I think you can make better judgments about whether the 

CFTC or anyone else actually, including internally, we performed 

our responsibilities. 

Mr. ROYCE. My time has expired, Mr. Chairman. Thank you. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now, the gentleman from New Jersey, Mr. Garrett, is recognized for 5 minutes. 

Mr. GARRETT. I thank the chairman, and I thank you, Governor, 

for being here. 

Governor, you go to great lengths in your testimony to explain 

that in your opinion, none of the firm’s European sovereign debt 

trade ever lost money. I understand that. But obviously, you would 

also had to have known that the downgrades and other concerns 

could lead to margin calls, which is what occurred, and a loss of 

liquidity risk as well. And I think you allude to this in your testimony. So the question then becomes, isn’t it your job, as CEO and 

chief risk officer, and I believe your testimony or one of your statements someplace was, ‘‘I consider one of my most important jobs 

to be chief risk officer,’’ isn’t one of your jobs then to take this seriously? Isn’t this also really what got AIG, for example, which you 

talk about all the time, in trouble? Is it maybe that the bets were 

appropriate bets, all things considered, but it is the liquidity and 

the potential for downgrades that had to be considered and in this 

case were not? 

Mr. CORZINE. Congressman, it is not that they weren’t considered, but they probably weren’t measured, certainly after the fact, 

to the degree that they should have been factored in. 

Mr. GARRETT. I see. In the course of extensive interviews, we 

have learned from your former chief risk officer, Michael Roseman, 

that he expressed significant concerns with the liquidity risks associated with the growing repo market that you have already talked 

about tied to European sovereign debt. He said liquidity risks associated with these risks that we just talked about might ultimately 

sink the firm. First of all, do you think that he was right in that 

sense? 

Mr. CORZINE. First, Congressman, I believe that, by my recollection, that Mr. Roseman’s chief concern was the default risk, or restructuring risk, as opposed to liquidity risk. Mr. Stockman was 

much more focused on the liquidity risk than I think Mr. Roseman 

was. 

Mr. GARRETT. Was Mr. Stockman correct then, in that sense? 

Mr. CORZINE. The facts speak for themselves. 

Mr. GARRETT. Mr. Roseman apparently was uncomfortable with 

position limits. And you were talking about the process as far as 

going to the board for that. He was concerned apparently when 

they were set at $2 billion. I understand that you had to go to the 

board at least twice to approve limits above that level. And as the 

37 

position went above that level, eventually, it went to $4 billion in 

late October of last year. I guess at that point in time, according 

to Mr. Roseman, you sought to draw a proverbial line in the sand 

against any other increases and made that presentation to the 

board in November of 2010. Is that a correct assessment of what 

he was trying to do? 

Mr. CORZINE. I am not certain of the timeline, but I do— 

Mr. GARRETT. Generally. 

Mr. CORZINE. I accept that Mr. Roseman did not want to increase 

this. I would add that it was in the context of not only sovereigns, 

but other activities that we did in those countries with private investors and other credit arrangements. 

Mr. GARRETT. Gotcha. The board apparently, after those concerns, ultimately agreed to put a hard cap at $4.5 billion and revisit the position in February or March of this year. Mr. Roseman 

eventually was replaced in early January of this year. The question 

then is, when did you begin, if it was you, your search to replace 

him? Was it at this time of his departure or prior? 

Mr. CORZINE. This is to the best of my recollection— 

Mr. GARRETT. Sure. 

Mr. CORZINE. —we started a search sometime around the first of 

February. 

Mr. GARRETT. Immediately or sometime after his departure? 

Mr. CORZINE. Mr. Roseman and I had a conversation about 

whether there were other things that he might want to do, and 

would we want to have additional folks, and would he help us in 

a transition. 

Mr. GARRETT. Okay. Now, you mentioned Mr. Stockman before, 

and he was more concerned about the liquidity risk aspect of it. 

But it was under him, I guess, then, that the board decided to go 

past that $4.5 billion cap that just previously had been set on a 

previous review date in February or March. How did it happen that 

they went once again above the limit they had set upon themselves, or for the company I should say? 

Mr. CORZINE. I would, to my recollection, suggest that I went and 

asked for specific sovereign authority on individual countries. 

Mr. GARRETT. Okay. 

Mr. CORZINE. And to my recollection, the board was more comfortable with some sovereigns than they were others, ones that had 

higher ratings and were more comfortable having larger size— 

Mr. GARRETT. So, collectively, they decided that they could go beyond that? 

Mr. CORZINE. My request actually was for smaller size, but to 

take into consideration what the European community had put in 

place to back up Ireland and Portugal. 

Mr. GARRETT. If the Chair would allow just one last question 

then. In the interview—see if this is correct in my understanding 

of the interview with Mr. Stockman—he mentioned that he did not 

have liquidity risk in his portfolio. First of all, is that correct? And 

if that is correct, why was that decision made to take out of his 

portfolio of responsibility? 

Mr. CORZINE. Congressman, I really—I don’t know how to respond to that. Liquidity risk was certainly something that we conVerDate Nov 24 2008 18:25 Jul 16, 2012 Jkt 072635 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\72635.TXT TERRIE
38 

stantly depended upon our risk department to address. Whether he 

had limit authority, I can’t speak to it. 

Mr. GARRETT. Thank you. I will yield back to the Chair with 

that. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now, the gentleman from New York, Mr. Grimm, is recognized for 5 minutes. 

Mr. GRIMM. Thank you, Mr. Chairman. 

Mr. Corzine, you just testified a moment ago, my colleague, Mr. 

Royce, asked you a question, and you responded in part, at some 

place I actually had expertise. And I assume you were talking 

about at your time at Goldman. 

Mr. CORZINE. Congressman, I grew up in the government securities business, and I was responding to the fact that Mr. Royce 

raised this issue about the primary dealership. And this had been 

something that I probably had spent 15 years, had been very, very 

active in that marketplace. 

Mr. GRIMM. Okay. But you would say that as the CEO at MF 

Global, you had some expertise. Is that correct? 

Mr. CORZINE. Certainly with regard to the government securities 

markets. 

Mr. GRIMM. Okay. And you were asked a little bit about your deference. Do you think you could have gotten any special treatment 

because of deference because of the positions that you have held? 

And I just want to note that you were granted a 3-year extension 

of your employment agreement in 2011. And two of the reasons 

they cited were success in securing primary dealer status and improving the posture with regulators, the company posture with regulators. Do you think that would definitely have something to do 

with maybe some deference to who you are and your status? I 

mean, plausibly? 

Mr. CORZINE. Congressman, it is plausible. But I think what— 

Mr. GRIMM. That is all I needed to know. Thank you very much. 

Let me ask this: You mentioned before in your statements that 

you actually came in when the leverage was about 40 to 1, and 

brought it down to say 30 to 1. Is that correct? 

Mr. CORZINE. Yes, sir. 

Mr. GRIMM. Okay. Mr. Pearce started to hit on it, but he didn’t 

let you answer the question, so I am going to let you answer the 

question. When you analyze the records for seven quarters in a 

row, you run up your leverage right after the quarter ends. So you 

delever right before the filings for seven quarters in a row. That 

I am sure you know is known as window dressing. But let’s go 

through that. These are the repos 105, I believe. Right? These are 

105? Or— 

Mr. CORZINE. To my knowledge, Congressman, there were no 

repo 105s executed at MF Global. 

Mr. GRIMM. There weren’t. Okay. Then what repos did you use? 

Is it not true that after each filing, for seven quarters in a row, the 

leverage went dramatically up? 

Mr. CORZINE. Congressman, because our systems were not as 

strong as we would like them to be, we only netted positions at the 

close of a quarter. That is if you were long in a security in one account and shorted in another— 

39 

Mr. GRIMM. Thank you for the explanation, but ultimately if I 

look at your seven quarter filings in a row, at the end of each filing, your leverage is one place, and then right after that filing, 

your leverage is much higher. Regardless of why, is that a factual 

statement or not? 

Mr. CORZINE. I can’t actually answer that question. 

Mr. GRIMM. Okay. Maybe the CFO can answer that question. 

Would a strict analysis of someone who knows nothing, say like 

me, who is not involved in MF Global, if I look at your quarterly 

filings, is that statistically a fact, regardless of why? 

Mr. ABELOW. Congressman, the CFO isn’t here today. I apologize. 

Mr. GRIMM. I am sorry. You are the acting president? 

Mr. ABELOW. I was the president. And I don’t have those records 

with me, so I can’t verify. I was not at the company seven quarters 

ago. And I don’t know what happened the day before or the day 

after. 

Mr. GRIMM. Okay. And Mr. Corzine, you don’t recall seven quarters in a row? There was an article about this. So I am assuming 

it was brought to your attention. It was written in—I am sure you 

read the article. 

Mr. CORZINE. Congressman, I am not familiar with the article. 

Mr. GRIMM. You are not familiar with that article? 

Mr. CORZINE. I am not familiar with that article. 

Mr. GRIMM. Okay. Outstanding. Let me ask you this. I think 

there are millions of people who are familiar with that article. I am 

going to just say, I don’t believe that answer, Mr. Corzine. If I am 

the CEO of a company and a major national newspaper writes an 

article about my company alleging that I did something that is unethical, window dressing, maybe not illegal but unethical, I would 

know about it. I can’t believe that no one said to you, called you 

and said, ‘‘Hey, you see that article they wrote about you?’’ I get 

that now as a Member of Congress: ‘‘Hey, did you see that article 

they wrote about you?’’ You don’t know about that article. You just 

testified under oath you did not know about this article. 

Mr. CORZINE. I don’t know the date. 

Mr. GRIMM. Fair enough. That is your testimony. 

Mr. CORZINE. I don’t know the date or what newspaper. 

Mr. GRIMM. The Wall Street Journal. It is a small little tablet. 

You testified before about unreconciled differences in segregated 

accounts. Unreconciled differences. I am not a CEO. I haven’t been 

a Senator. What is ‘‘unreconciled differences?’’ Does that mean 

there is money missing in the account? 

Mr. CORZINE. It means that there are not the assets that were 

supposed to be held against the segregated dollars that we were responsible for. 

Mr. GRIMM. And do you reconcile every day at the end of the 

day? 

Mr. CORZINE. Absolutely. 

Mr. GRIMM. Every day broker-dealer and so on? 

Mr. CORZINE. Have to submit to the CFTC that you are in reconciliation. 

Mr. GRIMM. So unreconciled difference means something is missing? 

40 

Mr. CORZINE. Either that or— 

Mr. GRIMM. No. I mean in your case, not in the abstract. We are 

talking about MF Global, the company you were in charge of. What 

did that mean, ‘‘unreconciled differences?’’ 

Mr. CORZINE. We were not in balance in our segregated accounts. 

Mr. GRIMM. Not in balance? What does that mean, ‘‘not in balance?’’ 

Mr. CORZINE. It could mean we didn’t have control of collateral, 

it could mean we had money that moved that shouldn’t have 

moved. 

Mr. GRIMM. You had money that moved that shouldn’t have 

moved. Who other than you, is it the Treasury Department within 

that has the authority to move that money? 

Mr. CORZINE. Yes, sir. 

Mr. GRIMM. My time has expired. 

Chairman NEUGEBAUER. I thank the gentleman. 

Now the gentleman from Michigan, Mr. Huizenga, is recognized 

for 5 minutes. 

Mr. HUIZENGA. Thank you, Mr. Chairman. 

And I am, frankly, intensely interested where my friend from 

New York was going. So if it is all right, I am going to give you 

30 seconds of my time so you can quickly finish that up. 

Mr. GRIMM. Thank you. I appreciate that. 

At the end of each day, you just testified that they reconciled. 

Prior to this time that we are talking about now, the demise, the 

explosion here, were you ever—did you ever have unreconciled differences in your account. 

Mr. CORZINE. Not to my knowledge. 

Mr. GRIMM. Never. Okay. That is good to hear. What is the first 

thing that would happen when they found out that there was something out of balance, something was unreconciled? Would you get 

a call, as the CEO, from treasury? 

Mr. CORZINE. If it was a serious imbalance, yes. 

Mr. GRIMM. And is that what happened, you got a call? 

Mr. CORZINE. There was work trying to reconcile this, and I 

know this after the fact, not before the fact, on that Sunday. 

Mr. GRIMM. But this is a serious unbalance, this is a pretty serious difference, correct? 

Mr. CORZINE. From only what I have been able to discover afterwards from reading some of the press reports— 

Mr. GRIMM. Okay. So as soon as they found out, treasury found 

out that it was unreconciled, did they call you or not? 

Mr. CORZINE. I was notified on Sunday evening— 

Mr. GRIMM. Okay. So they didn’t call you, they did not call you 

then when they—when they closed the books at the end of the business day, it was not reconciled, but they did not call you. 

Mr. CORZINE. It was normal operating procedure to have the calculation done the following business day, which was Friday to Monday. And so folks were working on this reconciliation through the 

weekend. I think there was a— 

Mr. GRIMM. Who ultimately notified you then that there were 

unreconciled differences? 

Mr. CORZINE. The CFO. 

Mr. GRIMM. The CFO. 

41 

Mr. HUIZENGA. I would like to reclaim my time at this point. It 

quickly turned into 10 minutes. Kind of along that line, do you recall making this statement: ‘‘Our positions and the judgment about 

risk mediation steps are my personal responsibility.’’ That is according to Bloomberg regarding an October 25th conference call regarding these quarterly losses and the debt downgrade. You then 

saw a 67 percent loss in value there. Do you recall making that 

statement? 

Mr. CORZINE. I recall something of that nature made. 

Mr. HUIZENGA. Okay. That was the quote in the article. 

And I am just curious, we all get here, you sat on this side of 

the microphone, I am sure you are wishing you weren’t sitting on 

that side of the microphone today, but are you a hands-on kind of 

guy, a detailed kind of guy? 

Mr. CORZINE. In markets and clients’ activities, I think most people would— 

Mr. HUIZENGA. But in general life? Because I know I am here 

and I like asking questions. I like knowing about what is going on. 

Are you a control freak type, or are you the, hey, we will let things 

kind of play out and see what happens? 

Mr. CORZINE. When it comes to the things that I understand and 

have expertise in, I am very hands on. 

Mr. HUIZENGA. Okay. It seems to me that in the things that you 

have done in life, you have maybe had to strike a balance. I know 

I do. I have to know some details; I have to know about details on 

legislation. Do I know about every detail about every piece of legislation? Probably not, but I have people who follow that, and I have 

to go get it when a constituent asks. That is fair, right? I don’t 

think we are expecting you to know everything that every single 

employee is possibly doing during the day. But I think what my 

friend from New York is getting at is when you have some major 

issues like this, it would seem that responsibility lies in your office. 

That is what you said on October 25th. 

I can tell you, having some personal experience with attorneys 

and real estate brokers—I am a former REALTOR® myself—when 

you start commingling funds, when you start pulling funds that 

don’t belong to you to go do things, no matter how valiant, no matter how beneficial to you personally or the firm or whatever else, 

people lose their law licenses; people lose their brokerage licenses. 

I think that is why you are seeing such frustration, anger, and hostility at this. 

My phone started blowing up November 1st and late on October 

31st by people whom I had no idea in my district, whom I couldn’t 

even fathom had some sort of connection to MF Global, but they 

did, predominantly through the agricultural community. And it just 

seems to me that when you are claiming not to know details about 

some major, major issues that have been brought up here, it just 

doesn’t ring true. It just doesn’t ring like it is heartfelt. 

And Mr. Abelow, I know both of you were employed by the Global Holdings. I am assuming that this isn’t the only asset that Global Holdings had. I know you have operations in Canada, and Hong 

Kong, and England, and a number of places around the world. Correct? 

Mr. CORZINE. Yes, sir. 

42 

Mr. HUIZENGA. And are they all much like this structure, a separate entity operating in these other countries? 

Mr. CORZINE. Each country has its own regulatory structure, 

each country has its own finance structure. And there is cooperation across the global— 

Mr. HUIZENGA. And you communicate on a regular basis with 

those other entities? 

Mr. CORZINE. Yes, sir. 

Mr. HUIZENGA. And that seems to maybe get at, and I know my 

time is almost up here, but it seems like I think that is some of 

the concern is we are seeing this money get passed around. The fiduciary element feels like it is lost. Now, it might be there legally 

technically, but I can tell you as someone who had a fiduciary responsibility as a REALTOR® and a developer, and having those 

dollars come in, this certainly doesn’t feel or look like you were caring for those other people’s money the way that you should have, 

and certainly were expected to. One last question: Did you have 

personal dollars yourself in those segregated fund accounts? 

Mr. CORZINE. I did not. 

Mr. HUIZENGA. You did not. So this was not any of your own 

money. You were just out with everybody else’s money. It was 

other clients. 

Mr. CORZINE. I didn’t have a futures account, didn’t trade for my 

own account. I thought it would be a conflict to be an active trader 

for my own purposes while I was leading a company. 

Mr. HUIZENGA. But you certainly were active in trading personally, correct? 

Mr. CORZINE. No. I bought shares in MF Global, which I think 

I have reported in my written statement. 

Mr. HUIZENGA. Yes. But you weren’t involved in the day to day 

choosing where things were going to be going? 

Mr. CORZINE. There were things that I traded through—we set 

up a very complex compliance structure, extra supervision, to make 

sure that when I executed a trade, first of all, I didn’t write a ticket, but somebody else did, that they were both observed and those 

procedures were followed. 

Mr. HUIZENGA. I know my time is up, but Governor Corzine, you 

have thousands of hardworking people around this country who 

feel cheated. And frankly, it is hard not to disagree with them. 

Thank you. 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. Dold is recognized for 5 minutes. 

Mr. DOLD. I thank the chairman. And certainly I want to thank 

the Governor. I appreciate your appearance and testimony here 

today and at other House committees and Senate committees as 

well. I am particularly interested in this issue. For the first time 

in 150 years, the Chicago Mercantile Exchange had customer funds 

missing. I represent the Northern District of Illinois and the 10th 

District, and I probably have more traders in my district than perhaps any other district in the country. So my first question for you is, when we look at the $1.2 billion 

missing, did you have any communications, whether in person, by 

telephone, by email, or text message, or any other means that specifically contemplated, addressed, or approved sending segregated 

43 

customer funds to serve as loans to, collateral for, or liquidity for 

broker-dealers whether or not they were MF Global affiliates or 

nonaffiliates? 

Mr. CORZINE. I believe the answer to that is no. 

Mr. DOLD. So today here, before this committee, you are saying 

that— 

Mr. CORZINE. I believe that— 

Mr. DOLD. I am just clarifying. 

Mr. CORZINE. —the moving of customer funds I never authorized, 

I never intended to authorize, nor do I think anyone could misconstrue anything I said that would authorize the moving of customer funds in an improper way. And so I don’t—you put a lot of— 

Mr. DOLD. Let me try to be more specific then, and not put so 

many of those caveats in there, because it was really trying to get 

to the point of certainly in today’s technology, did you receive any 

emails where you may have been CC’d that talked about moving 

customer funds? 

Mr. CORZINE. To my knowledge, and I haven’t been able to review all my records— 

Mr. DOLD. This is a pretty big deal, so I assume it would stick 

out. 

Mr. CORZINE. If someone sent me a memorandum, or an email, 

or a PDF off of an email that suggested we use customer funds, I 

wouldn’t have authorized it. 

Mr. DOLD. And you do not—at this point in time, you are saying 

that you do not remember receiving any of those? 

Mr. CORZINE. At this moment, I don’t recollect receiving any of 

those. 

Mr. DOLD. If segregated customer funds were used for MF 

Global’s purposes, wouldn’t you expect U.S. Treasuries or similar 

securities to be placed in the segregated accounts as a substitute 

for customer funds? 

Mr. CORZINE. That would be how the rule 1.25 requirements 

would work, on that basis. 

Mr. DOLD. Now, I do have just a couple more questions. You 

talked before about being notified that there was an imbalance. 

Correct? Just moments ago? 

Mr. CORZINE. Yes. Yes, sir. 

Mr. DOLD. Okay. Did any customer statements ever show that 

there was an imbalance in their account? 

Mr. CORZINE. Congressman, I can’t answer that question. I don’t 

know the answer to that. 

Mr. DOLD. My understanding is that no customer ever received 

a statement—do you have any knowledge of that? No customer 

ever received a statement that their account was in imbalance? 

Mr. ABELOW. I don’t know about that. Again, that I learned, as 

the Governor has stated, I learned on the evening of the 30th that 

there was an imbalance in customer funds. I don’t know if any 

statements went out subsequent to that date to customers because 

the filing for bankruptcy was the next morning. 

Mr. DOLD. Governor, you talked before about having the right 

people and the right policies in place. And I understand that is important. Do you know Stephen Grady, Dennis Klejna, or Joseph 

Murphy? 

44 

Mr. CORZINE. The first two gentlemen I know. 

Mr. DOLD. Okay. And the reason I bring up those names specifically is I think they were involved with the Refco bankruptcy, 

where a number of folks went to jail, and I think there were some 

significant fines paid in connection with related Justice Department consent orders. Do you know how they were connected to MF 

Global and what role they played in the weeks leading up to the 

bankruptcy? 

Mr. CORZINE. Mr. Grady was responsible for trying to bring 

about this joint venture or the sale of our FCM. He was actively 

involved in those negotiations and framing that activity in the days 

that led up to the bankruptcy and well before that. 

Mr. Klejna, Dennis, I couldn’t always pronounce his name, was 

in our general counsel’s office. I think he had previously served 

with the CFTC. 

Mr. DOLD. Were you aware of their roles with Refco? 

Mr. CORZINE. I was aware they were a part of the Refco acquisition that preceded my joining MF Global. 

Mr. DOLD. Any background checks, anything along those lines 

that would have highlighted the fact that they were involved and 

had some issues potentially with some fines through the Justice 

Department? 

Mr. CORZINE. I am not aware of those. 

Mr. DOLD. Mr. Chairman, my time has expired. 

Chairman NEUGEBAUER. I thank the gentleman. I have consulted 

with the ranking member, and we are going to have what I would 

call a lightning round. And if we could ask Members to keep those 

questions maybe to one question, or short questions so that we can 

move through that process. And I now recognize the ranking member. 

Mr. CAPUANO. I thank the chairman. 

Mr. Corzine, just one question, a ballpark, I would never hold 

you to exact numbers. It wouldn’t be fair. Approximately a week 

before the bankruptcy, a week, 10 days, whatever, do you know 

who the biggest creditor of MF Global was? And the creditor could 

be either a customer or somebody who was on the counterparty 

through a repo or any other instrument. 

Mr. CORZINE. I am glad you say that. I couldn’t give you specifics. I would suspect it was JPMorgan, but I don’t know it. They 

were our clearing bank. They were also responsible for our unsecured lending facility, and also responsible for our secured lending 

facility. 

Mr. CAPUANO. Would you have a ballpark idea how much that 

might be? And again, I am not trying to nail you on it. Just a ballpark. 

Mr. CORZINE. Well, 10 days before the bankruptcy, we hadn’t 

drawn on any of those facilities. 

Mr. CAPUANO. Okay. 

Mr. Abelow, the same question for you now, not 10 days before, 

but now, who is your biggest creditor? Again, with the same caveats. 

Mr. ABELOW. I apologize. I simply don’t know. 

Mr. CAPUANO. Okay. Thank you. 

45 

Chairman NEUGEBAUER. Mr. Corzine, you testified in the House 

Agriculture Committee hearing last week that it would be inappropriate for you to promote the designation as a primary dealer. In 

fact, you said it probably would have been criticized by the Fed if 

you did so. Is that a fair assessment? 

Mr. CORZINE. As I recall what I said, that is—and I would believe that using it as an advertising tool would be— 

Chairman NEUGEBAUER. On February 2nd, you sent out a press 

release stating, ‘‘Being designated a primary dealer by the Federal 

Reserve in New York is consistent with our global strategy of expanding our broker-dealer activities as we seek to serve our clients 

with broader execution services and greater market insight and 

ideas.’’ Would you say that was promoting your— 

Mr. CORZINE. That was just part of the announcement that we 

were recognized. We had to say something. And I don’t believe that 

is implying a Good Housekeeping Seal from the Federal Reserve. 

Chairman NEUGEBAUER. In fact, the board, in a proxy statement, 

said, ‘‘In granting Corzine a 3-year extension of his employment 

agreement in 2011, the board compensation committee noted that 

his performance had been exemplary since joining the firm over a 

year ago. The board also noted that Corzine’s accomplishment in 

near-term building blocks, including significant improvements in 

the reputation of the firm as demonstrated by its ability to hire 

quality officials, the company’s success in securing primary dealer 

status, its growing client balances, and improving posture with the 

regulators.’’ 

So it seems that was a big deal. 

Mr. CORZINE. Internally, there is no question that people felt 

good about having that designation. But it was not something that 

we advertised or promoted to our clients. There were many clients 

who will not do business with people who are not designated primary dealers. And so, the mere fact that designation exists is a 

good thing, which I think the board was trying to recognize. 

Chairman NEUGEBAUER. Did that give you borrowing power at 

lower—having that dealer status, did that allow you to access credit at a cheaper rate? 

Mr. CORZINE. If it did, I am not aware of it. There are—the more 

lenders there are, the more likely it is that you will have marginally better rates. But we didn’t see a meaningful element in that. 

And as you know, Mr. Chairman, we are at very low interest 

rates in the short-term markets today anyway. And I don’t think 

those were impacted by that. 

Chairman NEUGEBAUER. Thank you. 

Mr. Perlmutter? 

Mr. PERLMUTTER. Thanks. I guess my questions are similar to 

Mr. Capuano’s as to who got paid and who didn’t get paid here. 

Just as simple as that. Secured creditors. I am just trying to figure 

out what happened in that week advance. Because if you hadn’t 

drawn on the facilities 10 days in advance of this thing, everything 

kind of cratered in the last 10 days. 

So did the secure creditors come in and sweep these accounts and 

then assets that you thought were assets just sort of evaporated because sovereign debt went down? And that has a question mark at 

the end. 

46 

Mr. CORZINE. Congressman, I said this and I meant it sincerely, 

I apologize, I don’t have the information to that. And those are the 

kinds of things that you would have to go through the records. I 

don’t know whether that happened or it didn’t happen. 

Mr. PERLMUTTER. Okay. I guess at some point, SIPC placed MF 

Global in bankruptcy, and then that froze everything. And this will 

all, the story will be told, as you have said, over the course of the 

next few years. But I look back at CME, I look back at all of the 

regulations and laws we have in place, and I am trying to figure 

out today how—is there something that needs to be improved in 

Dodd-Frank or Sarbanes-Oxley or the 1933 Act where some firewalls need to be built? And I guess until we really know this whole 

story, we won’t know, because it seems like there, especially with 

CME, there should have been a lot of protections. 

Mr. CORZINE. Congressman, I believe we need the facts to be determined so that we can figure out where the mistakes were, what 

was the cause of the problem. 

Mr. PERLMUTTER. Okay. 

I yield back. Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. Thank you. 

And the gentleman from New Mexico, Mr. Pearce, is recognized. 

Mr. PEARCE. Thank you, Mr. Chairman. 

Governor, what was your pay when you were working with MF? 

Mr. CORZINE. I was—I started out with a salary of $1.5 million, and I think it was in the second year down to about $750,000 a 

year. 

Mr. PEARCE. Any performance bonuses on top of that? 

Mr. CORZINE. I had a guarantee when I joined the firm, which 

I took less than the guarantee. I don’t— 

Mr. PEARCE. How much of a guarantee? 

Mr. CORZINE. I don’t quite remember, sir. 

Mr. PEARCE. Just approximately. 

Mr. CORZINE. I think it was a million and a half. It could have 

been a million and three-quarters. 

Mr. PEARCE. Mr. Abelow, how about you? 

Mr. ABELOW. Congressman, my total compensation in the time that I was at MF was a guaranteed amount of approximately $3 

million. 

Mr. PEARCE. Okay. I think, Mr. Corzine, that you had testified to Mr. Neugebauer that you didn’t know anything about the $117 

million loan when he was asking his first questions. Is that correct, 

that there is some loan that— 

Mr. CORZINE. As I said, I don’t know of any loan that was backed 

by customer funds. I wouldn’t have authorized it. And as I said in 

my oral testimony, there were questions raised by JPMorgan about 

the transfer of funds from New York to London accounts, I don’t 

know whether they were loans or I know it was based on the issues 

of overdrafts. I had oral confirmation from the people in Chicago. 

And as I said, I believe I have written confirmation from the people 

in Chicago that it was appropriately funded. 

Mr. PEARCE. You testified to Mr. Grimm’s questions that you 

didn’t know about the window dressing, the article that appeared 

in the Wall Street Journal on November the 4th of this year. They 

were kind of walking back through. If you didn’t know about that, 

47 

kind of what level did things have to get to before you were notified? In other words, all these people below you scurrying around 

and putting things in place and taking things out, and you the 

CEO, you didn’t have day-to-day knowledge, and it is not your 

background, not your expertise. What does a CEO actually—when 

do they have to come to you and say—what level does it have to 

reach before they notify you? I find this compensation package and 

your day-to-day knowledge not very thorough, frankly, in this testimony. And so what was the threshold at which they had to come 

to you? 

Mr. CORZINE. Congressman, with regard to being out of balance 

with client funds, they would have to come on a much, much smaller scale than the hundreds of millions that I heard about on Sunday. 

Mr. PEARCE. Yes. So the fact that we are sitting over here on this 

side of the desk and there is $1.2 billion missing and you have no 

day-to-day knowledge of it is just incredible. It is just incredible. 

I yield back, Mr. Chairman. Thank you. 

Chairman NEUGEBAUER. I thank the gentleman. 

The gentleman from Florida, Mr. Posey, is recognized. 

Mr. POSEY. Thank you, Mr. Chairman. 

Mr. Pearce, although he said he did not read that article that 

Mr. Grimm was holding up, 3 minutes later in an answer, he said 

when he read articles about that problem. So one of us is confused 

there I think. 

Mr. Corzine, you stated that after, I think you used the term 

‘‘significant imbalances’’ were discovered on October 31st, no statements were sent out. I am looking at a statement dated November 

7th. It indicates no imbalances whatsoever. And there are others 

besides the one I am holding in my hand here. How can that be? 

Mr. CORZINE. Congressman, I am not trying to avoid the question, but I left the firm on November 3rd. And I would not know 

what was included in those statements even if I had access to my 

records. 

Mr. POSEY. Okay. I am not saying that it is your fault, my fault, 

his fault, her fault, God’s fault, nobody’s fault. But isn’t it clear 

that somebody is lying to the clients if they send out a statement 

that says there are no imbalances when, in fact, it is a week after 

I think you used the term ‘‘significant imbalances’’ were discovered? 

Mr. CORZINE. Congressman, I don’t know how that confirmation 

or that notification was sent. So it would be hard for me to categorize it. 

Mr. POSEY. It is a statement like they send out every single 

month. They have been getting the same statements for years. Just 

like all the others. That is how it was sent out. It is obviously a 

standard procedure, a standard policy. 

Mr. Abelow, can you shed any light on this? 

Mr. ABELOW. Sir, I don’t know what statement you have in front 

of you. I haven’t seen it before. 

Mr. POSEY. You have never seen one of your customers’ statements before? You don’t know what they look like? 

Mr. ABELOW. Sir, you are referencing a statement on a specific 

date which I have not seen. 

48 

Mr. POSEY. But it is the same style statement every day. Do you 

change your statements every month? 

Mr. ABELOW. Congressman, as I stated earlier, the operating 

company, the regulated company MF Global Incorporated, was 

placed under an SIPC trustee on, I believe, October 31st. So a 

statement subsequent to that date I wouldn’t have any information 

about. 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. POSEY. Slippery when dry. 

Chairman NEUGEBAUER. The gentleman from Texas, Mr. 

Canseco, is recognized. 

Mr. CANSECO. Thank you, Mr. Chairman. 

Just a couple of follow-up questions. Mr. Corzine, how much of 

the shortfall is due to slippage in collateral transfers, and how 

much was seized by creditors through margin calls after the firm 

was technically bankrupt? 

Mr. CORZINE. Congressman, I don’t know the answer to that 

question. And I would have to do a real analysis with people who 

knew how to read the thousands of pages. That is what I presume 

that the investigators are doing at this moment. 

Mr. CANSECO. Any venturing, any opinion one way or the other? 

Mr. CORZINE. Congressman, I am as interested in the answer to 

that as you are. 

Mr. CANSECO. Thank you. Let me go to your Web site that proclaimed to the public in October, now this is October of this year, 

that MF Global has an extremely liquid and high-quality balance 

sheet that consists primarily of client payables and short-term 

Treasuries and agencies, slash, contains minimal level three trading assets. Now, if those statements are true, then how did MF 

Global go bankrupt and lose over $1 billion in customer funds in 

less than a month after that statement was made? 

Mr. CORZINE. Congressman, I think that statement is consistent 

with how our balance sheet looked. I think that once there is a loss 

of confidence, the financing techniques that I think we have talked 

about here today, repurchase agreements, and the need to put up 

additional margin calls, can put extreme pressure on a financial institution. It should not have put so much financial pressure that 

anyone would have improperly used customer funds. 

Mr. CANSECO. Okay. Fair enough. 

Now, Mr. Abelow, there are news reports stating that Mr. 

Corzine had a personal trading account as CEO of MF Global. In 

fact, it is reported that he was making trades from his BlackBerry 

in the middle of meetings. Now, in your expert opinion, is it proper 

for a CEO of such a large company as MF Global to be engaging 

in such transactions? 

Mr. ABELOW. Congressman, I have no frame of reference. I 

haven’t worked directly for a CEO of a similar firm before. 

Mr. CANSECO. Okay. Were customers or investors of MF Global 

ever made aware that the CEO of the company was spending so 

much time trading? You don’t know whether he was out there trading or doing things for clients or for his own account? 

Mr. ABELOW. I am not aware of any specific question or disclosure related to how the chairman of the company spent his time. 

Mr. CANSECO. Thank you. 

49 

I yield back the balance of my time. 

Chairman NEUGEBAUER. Mr. Dold is recognized. 

Mr. DOLD. Thank you, Mr. Chairman. 

I appreciate the second lightning round. I wanted to just get back 

into something that my colleague Mr. Renacci was talking about 

when he was going over kind of the role, I would say the unique 

role that the board played at MF Global in terms of trying to be 

involved in terms of risk and being able to—the request to take on 

additional risk. Do you know of any other firm that operated like 

that? 

Mr. CORZINE. I believe that delegations of authority on risk flow 

from boards in most major financial institutions. 

Mr. DOLD. But how about day to day-type operations? My understanding was— 

Mr. CORZINE. If there were major exposures, which certainly the 

euro sovereign RTM positions were a major exposure, then it 

would, in most companies, flow, I believe, to a board. Certainly as 

a CEO, I would want my board to be aware of the kinds of things 

that would be of risk to the company. 

Mr. DOLD. Can you just give me some sort of an idea about what 

their qualifications were? Were they engaged former traders? Were 

there former management in terms of futures and equities that sat 

on the board? 

Mr. CORZINE. There were—the lead director was a former senior 

officer at Merrill Lynch, which has an FCM, and is very active in 

futures markets. There was a gentleman in London who was a senior member of the management team at ICAP, which is also another significant futures and options player. There is— 

Mr. DOLD. I think we can establish that there were some folks 

who were on the board. 

Mr. CORZINE. Yes. 

Mr. DOLD. I guess my point is it seemed to me when you were 

talking to Mr. Renacci that you were talking about having to go to 

the board to overrule certain things or to get additional risk and 

retention even outside of the monumental ones that you were talking about with the European sovereign debt. Maybe I am misinterpreting that. 

Mr. CORZINE. There were requests to the board, certainly from 

time to time starting after December, as the position grew. And 

sometimes, the board said no. 

Mr. DOLD. Okay. Governor, I just want to follow up with one last 

thing that Mr. Posey was talking about, and then I will yield back. 

The statements that went out—you said, ‘‘I have no idea how the 

statements went out.’’ The statement that he just held up in front 

of us, I assume that is a statement, that general looking statement 

is a statement that you have seen before. 

Mr. CORZINE. Yes, sir. 

Mr. DOLD. How about you, sir? 

Mr. ABELOW. I didn’t see it, so I will assume that it was a normal 

course statement. 

Mr. DOLD. Okay, a normal course statement. The long and the 

short of it is you basically said you don’t know how it would have 

gone out on November 7th because you had left just days prior. 

50 

Had you still been there, would that statement have still said the 

same thing or would there have shown— 

Mr. CORZINE. We are an operating business, and if we are sending out nonfactual information, something would have had to be 

done. But we would have had to correct that imbalance. We would 

have had to go more than just reconcile, we would have to had customer funds properly segregated. 

Mr. DOLD. So are you saying that, if indeed, this did go out and 

no customer statements were augmented, that there was some impropriety that was going on after you left? 

Mr. CORZINE. Congressman, I don’t want to speculate about that. 

I can’t believe that the trustee, who has a very high reputation, is 

doing—at least from my following of the information, trying to do 

everything he can to return customer funds to the clients. I would 

have to think that is an oversight or somebody forgot to turn off 

the computer. 

Mr. DOLD. One last thing. Did MF Global use an off-the-shelf 

risk-management program or was it proprietary? 

Mr. CORZINE. To the best of my recollection, we had multiple risk 

management systems for different product lines. 

Mr. DOLD. Off the shelf or proprietary? 

Mr. CORZINE. Many of them were off the shelf, some were proprietary, and they all folded into the global risk management activities in our risk department. 

Mr. DOLD. Thank you. 

Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentleman. 

And I thank the panel. There are no further questions from the 

Members. This panel is dismissed. We will call up the second panel 

now. 

Before the second panel gets too comfortable, I would ask you to 

stand please, and raise your right hand. 

[Witnesses sworn.] 

Chairman NEUGEBAUER. On our second panel, we have: Dan 

Berkovitz, General Counsel, Commodity Futures Trading Commission; Robert Cook, Director, Division of Trading and Markets, U.S. 

Securities and Exchange Commission; Terrence Duffy, executive 

chairman, CME Group Inc.; Richard Ketchum, president, chairman, and chief executive officer, Financial Industry Regulatory Authority; James Kobak, chief counsel to James Giddens, Bankruptcy 

Trustee for MF Global Inc.; and Thomas Baxter, general counsel, 

Federal Reserve Bank of New York. 

I would just remind all of you that your full written statements 

will be made a part of the record. We ask you to summarize your 

testimony in 5 minutes. 

Mr. Berkovitz, you are recognized for 5 minutes. 

STATEMENT OF DAN M. BERKOVITZ, GENERAL COUNSEL, 

COMMODITY FUTURES TRADING COMMISSION (CFTC) 

Mr. BERKOVITZ. Good afternoon, Chairman Neugebauer, Ranking 

Member Capuano, and members of the subcommittee. Thank you 

for the opportunity to testify. 

Chairman NEUGEBAUER. Mr. Berkovitz, would you make sure 

your button is on. 

51 

Mr. BERKOVITZ. Is that better? 

Chairman NEUGEBAUER. Much better. 

Mr. BERKOVITZ. Good afternoon. The Commission’s highest priority at this time is returning money to MF Global customers as 

quickly as possible. We are working around the clock to determine 

what happened to and to locate all of the customer funds. 

The MF Global Bankruptcy Trustee, with the assistance of the 

CFTC, has transferred nearly all positions of customers trading on 

U.S. markets and soon will have transferred approximately $4.2 

billion of customer property. Commodity customers will have quickly received approximately 72 percent of their account values. 

In FCM bankruptcies, commodity customers have priority in customer property. This includes segregated property, property that 

may have been illegally removed from segregation and is still within the debtor’s estate, and property that was illegally removed but 

has clawed back into the debtor’s estate by the trustee. 

If the customer property is insufficient to satisfy in full all the 

claims of the customers, part 190 of the Commission’s regulations 

allows other property of the debtor’s estate to be classified as customer property to make up any shortfall. A parent or affiliated entity, however, generally would not be a debtor unless customer 

funds could be traced to that entity. 

FCMs such as MF Global are subject to the Commission’s financial and reporting requirements. Frontline oversight is carried out 

by designated self-regulatory organizations, such as the National 

Futures Association or the Chicago Mercantile Exchange. 

DSRO responsibilities include establishing and enforcing rules to 

ensure the financial integrity of STMs and the protection of customer funds. DSROs are required to examine each FCM every 9 to 

15 months. Each FCM must submit to the Commission and to its 

SRO an annual financial report, certified by an independent public 

accountant. Annual reports are reviewed by the staff of the Commission’s Division of Swap Dealer and Intermediary Oversight 

(DSIO) as well as the SROs. 

FCMs are also required to file monthly unaudited financial reports. Each report must include a statement of financial condition 

and a statement of segregated funds. The DSROs conduct a primary review of the monthly financial statements. The CFTC staff 

conducts limited scope examinations of FCMs, either as part of the 

assessment of the DSRO’s examination function or on a for-cost 

basis. These examinations generally focus on specific issues at the 

firm and may include capital and segregation reviews. 

With respect to the protection of customer funds, by statute, an 

FCM must treat all money, security, and properties received from 

a customer to margin for the trades or contracts of that customer 

as belonging to that customer. All customer money, securities, and 

property must be separately accounted for and segregated from the 

FCM’s proprietary funds. Funds deposited by one customer to margin for secure trades may not be used for another. 

An FCM must notify the Commission immediately of any occurrence of undersegregation and of significant margin calls or whenever its capital drops below minimum requirements. 

Section 4(d) of the Commodity Exchange Act permits FCMs to invest customer segregated funds in obligation to the United States, 

52 

obligations fully guaranteed as to principal and interest by the 

United States and municipal securities. Commission regulation 

1.25 permits additional types of investments. 

On December 5th, the Commission voted unanimously to amend 

regulation 1.25 to impose new restrictions on these types of investments. Under the revised rule, permitted investments are those 

identified by statute, as well as certificates of deposit and money 

market mutual funds, commercial paper, and corporate notes or 

bonds that are fully guaranteed by the United States under the 

Temporary Liquidity Guarantee Program. The new rule also includes various concentration limites on investments. 

All FCM investments made with customer funds under regulation 1.25 must be kept by the FCM in the customer accounts. Further, when investing customer funds, the value of the customer’s 

segregated account must remain intact at all times. 

Thank you. I would be happy to answer any questions. 

[The prepared statement of Mr. Berkovitz can be found on page 

107 of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. Cook? 

STATEMENT OF ROBERT COOK, DIRECTOR, DIVISION OF 

TRADING AND MARKETS, U.S. SECURITIES AND EXCHANGE 

COMMISSION (SEC) 

Mr. COOK. Chairman Neugebauer, Ranking Member Capuano, 

and members of the subcommittee, my name is Robert Cook, and 

I am the Director of the Division of Trading and Markets at the 

Securities and Exchange Commission. Thank you for the opportunity to testify on behalf of the Securities and Exchange Commission concerning the collapse of MF Global. 

The bankruptcy of this firm and the apparent shortfall in segregated accounts of futures customers has resulted in serious hardship for many MF Global customers. 

We are committed to working with the trustee and our fellow 

regulators to help return customer assets, as well as to investigate 

any potential violations of law that may have contributed to customer losses. 

MF Global’s regulated U.S. subsidiary, MF Global Inc., or MFGI, 

was duly registered with the CFTC as a futures Commission merchant and with the SEC as a broker-dealer. As of October 31st, 

MFGI had approximately 36,000 futures customers and approximately 330 custodial accounts for nonaffiliated securities customers. 

MFGI was also the member of several futures self-regulatory organizations, or SROs and securities to SROs. For securities activities, the frontline supervision of a broker-dealer is performed by 

the SROs of which the broker-dealer is a member, in this case 

FINRA and various securities exchanges. 

There has been significant attention given to the repo-to-maturity transactions entered into by the firm on European sovereign 

debt. In the summer of 2011, SRO staff identified these transactions based on an analysis of MSGI’s financial statement and 

questioned whether the firm was recognizing them appropriately 

for purposes of its net capital computation. 

53 

The firm believed that the transactions should be subject to lesser capital charges than the SRO staff. The SRO staff, in consultation with and supported by SEC staff, ultimately required the firm 

to take the higher capital charges and to report the net capital deficiency for the month of July. 

Several months later, after reporting a substantial net loss with 

its stock, and with its stock and credit rating under pressure, 

MFGI entered the weekend of October 29th to 30th engaged in negotiations with various parties regarding potential strategic transactions, such as the sale of the firm’s customer business to another 

firm. 

I participated in communications with the firm management during this period, together with other SEC staff and at times other 

regulators. My recollection is that the CFTC’s request for more information about firm’s computations for its segregation accounts for 

futures customers was one of the issues discussed with the firm on 

Sunday, October 30th. 

When the firm subsequently reported early in the morning on 

Monday a significant deficiency in those accounts and that negotiations for a strategic transaction had ceased, firm management attempted to explain to regulators how the deficiency had occurred 

and whether it could be remedied. After consultation with the 

CFTC, we determined together that the safest and most prudent 

course of action to protect customer accounts and assets was to initiate a liquidation proceeding under SIPA. A referral was made to 

SIPA that morning. 

Since then, we have been working with SIPC and the trustee to 

return securities and funds to the securities customers of MFGI. 

Last Friday, the court approved the sale and transfer of approximately 338 accounts held for nonaffiliated customers of MFGI. The 

trustee estimates that the initial transfer will restore 100 percent 

of the net equity for more than 80 percent of these securities customers. 

The SEC has a set of rules designed to protect customer property 

by prohibiting broker-dealers from using customer funds and securities to support the proprietary positions. The rule requires 

broker-dealers that hold securities or cash for customers maintain 

physical possession or control over the securities that customers 

have paid for in full. 

Alternatively, if a customer has a margin loan, the customer protection will strictly limit the amount of securities that can be used 

for the broker-dealer for financing purposes. As to cash, the brokerdealer must also maintain a reserve in an account for the benefit 

of customers in an amount that exceeds the net funds attributable 

to customer positions. These funds cannot be invested in any instrument that is not guaranteed by the full faith and credit of the 

U.S. Government. 

Together, with the applicable SEC capital requirements and 

SIPC protections, this regime is meant ensure that if a broker-dealer fails, customer securities and funds will be readily available to 

return to those customers. The SEC will continue to work to identify further improvements to his customer protection regime. 

Thank you again for inviting me here today, and I look forward 

to answering your questions. 

54 

[The prepared statement of Mr. Cook can be found on page 115 

of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. Mr. Duffy? 

STATEMENT OF TERRENCE A. DUFFY, EXECUTIVE CHAIRMAN, 

CME GROUP INC. 

Mr. DUFFY. Chairman Neugebauer, Ranking Member Capuano, 

and members of the subcommittee, I am Terry Duffy, executive 

chairman of the CME Group. Let me start by saying the actions 

of Mr. Corzine’s firm, MF Global, have put a lot of market users 

in a tragic position. 

At CME Group, our efforts, with respect to the unprecedented 

loss of customer segregated funds caused by MF Global, have been 

to assist these customers and minimize market disruptions. 

My testimony summarizes reports from our staff, who were on 

site at MF Global along with the CFTC in the days immediately 

preceding its bankruptcy. My written testimony expands on the introductory statement and includes substantial background material. By the middle of the week of October 24th, MF Global had announced poor earnings and was downgraded by several credit rating firms. 

Sparking rumors that it would sell its brokerage business, CME 

was the designated self-regulatory organization for MF Global with 

responsibility for auditing its futures business. 

On Thursday, October 27th, two of our auditors went to MF 

Global’s Chicago offices to review MF Global’s daily segregation report for the close of business on Wednesday, October 26th. 

Wednesday’s segregation report, which is not available until 

Thursday, showed full compliance. Our auditors asked for the material necessary to check the numbers on the report against the 

general ledger and third-party sources and began the process of 

tying out the numbers for Wednesday’s report. 

That substantial review process of the Wednesday segregation 

report continued on Thursday and Friday. The MF Global segregation report for Thursday, October 27th, which was delivered to 

CME on Friday the 28th, also stated that MF Global remained in 

full compliance with segregation requirements. 

In fact, it showed that the firm held $200 million in excess of 

segregated funds. On Sunday, the CFTC informed us that they 

were aware of a draft segregation report for the close of business 

for Friday, October 28th, which showed a more than $900 million 

shortfall in required segregation. CFTC and CME staff and auditors returned to the firm on Sunday, October 30th, and were informed by MF Global employees that the discrepancy was caused 

by ‘‘an accounting error.’’ 

Our auditors worked with the CFTC, and devoted the rest of the 

day and night on Sunday to find the so-called accounting error. No 

such error was ever found. Instead, at about 2 a.m., on Monday 

morning, October 31st, MF Global informed both the CFTC and 

CME at approximately the same time that the shortfall was real 

and the customer segregated firms had been transferred out of segregation to the firm’s broker-dealer accounts. 

After receiving this information, CME remained at MF Global 

while MF Global attempted to identify funds that could be transVerDate Nov 24 2008 18:25 Jul 16, 2012 Jkt 072635 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 K:\DOCS\72635.TXT TERRIE
55 

ferred into segregation to reduce or eliminate the deficiency. A 

CME auditor also participated in a phone call with senior MF Global employees wherein one employee indicated that Mr. Corzine 

knew about the loans that had been made from the customer segregated accounts. CME Group has provided this information and 

the names of the individuals to the Department of Justice and the 

CFTC who are investigating these matters. 

On Monday, October 31st, the day the SIPC trustee took over 

MF Global, MF Global revised its segregation report from Thursday, October 27th, indicating that the alleged $200 million in excess segregated funds should have been reported as a deficiency of 

$200 million. The shortfall in segregation on Thursday, October 

27th, was hidden by the inaccurate report, a telling sign that regulators were being kept in the dark. It remains to be seen whether 

this failure to disclose permitted additional segregated funds to be 

improperly transferred. 

Throughout this time, the firm and its employees were under the 

direction and control of MF Global’s management. Transfers of customer funds effectuated by MF Global management for the benefit 

of MF Global constitutes a very serious violation of our rules and 

of CFTC regulations. We met our obligations to all other clearing 

firms and their customers. Also, at all times, we held $1 billion in 

excess of the required amount of customer segregated funds on behalf of MF Global’s customers. 

All of CME Group’s efforts have been directed towards speeding 

recovery and access to their trading accounts, transferring their positions and providing the trustee with a $550 million guarantee 

from CME Group to encourage him to quickly release customer 

funds that were securely held at CME clearing. No other exchange 

or clearing entity in the United States or abroad has done the same 

as CME group has done. The FederalFly mandated customer segregation program has been in place since 1936. 

In that time, prior to the MF Global failure, no customer has 

ever lost its segregated funds because of the failure of a clearing 

member of the CME. Moving forward, we intend to work with Congress, regulators, and the industry leaders to strengthen safeguard 

systems at the firm level. 

I thank you very much for your time and attention, and I look 

forward to your questions, sir. 

[The prepared statement of Mr. Duffy can be found on page 148 

of the appendix.] 

Mr. CANSECO [presiding]. Thank you, Mr. Duffy. 

Now, we will go to Mr. Richard Ketchum, president and CEO of 

the Financial Industry Regulatory Authority. Thank you. 

STATEMENT OF RICHARD G. KETCHUM, PRESIDENT, CHAIRMAN, AND CHIEF EXECUTIVE OFFICER, FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA) 

Mr. KETCHUM. Thank you, Chairman Neugebauer, Ranking 

Member Capuano, and members of the subcommittee. Thank you 

for the opportunity to testify today. 

My name is Richard Ketchum, and I am chairman and CEO of 

the Financial Industry Regulatory Authority, or FINRA. When a 

firm like MF Global fails, there is always value in reviewing the 

56 

events leading to that failure and examining where rules and processes may be improved. I commend the subcommittee for having 

this hearing to do just that. 

With respect to oversight of MF Global’s financial and operational compliance with the securities laws, which is most relevant 

to today’s hearing, FINRA shares oversight responsibilities for the 

Chicago Board Options Exchange and the SEC. 

For broker-dealers that are members of multiple SROs, the SEC 

assigns a designated examining authority, or DEA, to examine for, 

among other things, the firm’s compliance with the Commission’s 

net capital and customer protection rules. For MF Global, that 

DEA is CBOE. 

When FINRA is not the DEA for one of its regulated broker-dealers, we work closely with the DEA and routinely analyze the firm’s 

FOCUS report filings and annual audited financial statements as 

part of our ongoing oversight of the firm. While that monitoring focuses on a broad range of issues, it is particularly relevant to note 

that our financial surveillance team placed a heightened focus on 

exposure to European sovereign debt, beginning in the spring of 

2010. During April and May, our staff began surveying firms as to 

their positions in European sovereign debt as part of our monitoring in this area. 

In a review of MF Global’s audited financial statements filed 

with FINRA on May 31 of this year, our staff raised questions 

about a footnote disclosure regarding the firm’s repo-to-maturity 

portfolio. During discussions with the firm, FINRA learned that a 

significant portion of that portfolio was collateralized by approximately $7.6 billion in European sovereign debt. According to U.S. 

GAAP, RTMs, or repos to maturity, are afforded sale treatment 

and therefore not recognized on the balance sheet. 

Notwithstanding that accounting position, the firm remains subject to credit risk throughout the life of the repo. Beginning in midJune, FINRA, along with CBOE, had discussions with the firm regarding the proper treatment of the RTM portfolio. Our view was 

that while recording the repos as sales was consistent with GAAP, 

they should not be treated as such for purposes of the capital rule, 

given the market and credit risk those positions carried. As such, 

we asserted that capital needed to be reserved against the RTM position. 

FINRA and CBOE also had discussions with the SEC about our 

concerns. The SEC agreed with our assertion that the firm should 

be holding capital against these positions. The firm fought this interpretation throughout the summer, appealing directly to the SEC 

before eventually conceding in late August. 

MF Global infused additional capital and made regulatory filings 

on August 31st and September 1st that notified regulators of the 

identified capital deficiency and the change in net capital treatment of the RTM portfolio. Following this, FINRA added MF Global to alert reporting, a heightened monitoring process whereby we 

require firms to provide weekly information, including net capital 

and reserve formula computations. 

During the week of October 24th, as MF Global’s equity price declined and its credit rating was cut, FINRA increased the level of 

surveillance over the firm. At the end of that week, FINRA was on 

57 

site at the firm with the SEC as it became clear that MF Global 

was unlikely to continue to be a viable, stand-alone business. Our 

primary goal was to gain an understanding of the custodial locations for customer securities and to work closely with potential 

acquirers in the hope of avoiding SIPC liquidation. As has been 

widely reported, the discrepancy discovered in the segregated funds 

on the futures side of the firm ended those discussions. 

While FINRA believes that the financial security rules of the 

SEC, combined with SIPC, create a good structure for protecting 

customer funds, firm failures provide opportunities for review and 

analysis of where improvements may be warranted. FINRA has 

two proposed rules that we believe would assist us in our work to 

monitor the financial status of firms. 

One of the proposals would expedite the liquidation of a firm 

and, most importantly, the transfer of customer assets. Firms 

would need to contractually require their clearing banks and 

custodians to provide transaction feeds to the firm, regulators, and 

SIPC after the commencement of liquidation. The rule would also 

require carrying or clearing firms to maintain current records in a 

central location. The other proposed rule would require FINRA-regulated firms to file additional financial or operational schedules or 

reports as we deem necessary to supplement the FOCUS report. 

FINRA shares your commitment to reviewing MF Global’s collapse. We will review our own rules and procedures, but would also 

be pleased to participate in a coordinated review with our fellow 

regulators to provide a broader assessment of where current processes may be enhanced. 

Again, thank you for the opportunity to share our views. I would 

be happy to answer any questions you may have. 

[The prepared statement of Mr. Ketchum can be found on page 

153 of the appendix.] 

Mr. CANSECO. Thank you, Mr. Ketchum. 

Now, we proceed to Mr. James Kobak, chief counsel to Mr. James 

Giddens, Bankruptcy Trustee for MF Global. 

STATEMENT OF JAMES B. KOBAK, JR., CHIEF COUNSEL TO 

JAMES GIDDENS, BANKRUPTCY TRUSTEE FOR MF GLOBAL, 

INC. 

Mr. KOBAK. Chairman Neugebauer, Ranking Member Capuano, 

and members of the subcommittee, thank you for inviting me to 

testify today about efforts to identify, preserve, and return assets 

to the former customers of MF Global Inc. 

My name is James B. Kobak, Jr. I am lead counsel to James 

Giddens, the court-appointed trustee for MF Global Inc. under the 

Securities Investor Protection Act. I would like to provide an update on the actions we are taking to protect the former customers 

of MFGI. 

The trustee appreciates the interest of this committee and the direct encouragement for Members of Congress to return assets to 

customers of MF Global Inc. as quickly as possible, consistent with 

the law. We share that sense of urgency. 

The Office of the Trustee has been working closely and continuously with the Securities Investor Protection Corporation, the 

58 

CFTC, and the SEC and has been receiving invaluable assistance 

on transfers from the CME. 

By statute, the trustee is the customers’ advocate. His staff includes legal experts, consultants, and forensic accountants. We 

take very seriously our obligation to protect customers of the failed 

firm. We are focused on returning assets as quickly as possible but 

in a manner that is fair and consistent with the applicable provisions of the Securities Investor Protection Act, the Bankruptcy 

Code, and the relevant CFTC regulations. Every distribution we 

have made has been approved by the bankruptcy court. We are distributing as much as we can as soon as we can within the law. 

I am very pleased to report that distributions to nearly all of the 

approximately 36,000 former retail customers with U.S. futures positions, whether farmers, day traders or institutional investors, 

have been made within weeks of the bankruptcy filing. We are now 

in the process of implementing a third bulk distribution that will 

bring the total amount of customer distributions to more than $4 

billion. 

The order approving that distribution was entered by the bankruptcy court on Monday. The first distributions in this bulk transfer were made yesterday. I believe they should be appearing in customers’ accounts as of today and total $1.7 billion. The remainder 

should be completed within 2 to 4 weeks. 

With this third transfer, retail commodities customers with U.S. 

positions will have received approximately 72 percent of the value 

of their accounts. We have also moved ahead with the court-approved transfer of MF Global Inc.’s approximately 330 nonaffiliate 

securities accounts. This will return between 60 percent and 100 

percent of the assets in those accounts. 

At the same time, the customer claims process, which will assure 

that everyone is treated fairly in accordance with the law, is also 

up and running. Claim forms have been sent by mail and forms are 

available on our Web site. Claims are being filed and reviewed as 

we speak. And as we meet here today, some claims have already 

been determined and allowed. 

As part of his statutorily mandated duty, the trustee is also investigating the extent of the apparent shortfall in customer funds. 

The Department of Justice, the CFTC, and the SEC are also conducting investigations. We are coordinating with those investigations. 

Our investigation, however, is not a law enforcement investigation. It is primarily focused on identifying and recovering funds for 

customers. 

To understand the apparent segregation and compliance shortfalls, it is important to remember that there are three categories 

of segregated customer assets at MF Global Inc: first, there are 

customers with U.S. futures positions, which are primarily under 

the jurisdiction of the CME; second, there are U.S. customers with 

substantial foreign futures positions; and third, there are securities 

customers. 

At this time, we don’t know with certainty the amount of the potential segregation and compliance shortfalls, but our best estimate 

of the figure remains that it is not less than $1.2 billion across all 

three categories of customer assets that I have just described. 

59 

We arrive at this estimate by comparing the actual assets we believe are available or have collected from depositories with an estimate of the claims. The full amount of the shortfall cannot be 

known with certainty until the claims process is complete. 

No matter the final amount of the shortfall, this is, as the chairman has described it, completely unacceptable, and as the trustee 

characterized it in his testimony Tuesday, an appalling situation. 

The ultimate shortfall will likely be significant, and this will substantially impact the trustees’ ability to make a 100 percent distribution to former customers in the immediate term. 

Exhaustive efforts to collect funds from U.S. depositories continue. Assets located in foreign depositories, however, are now 

under the control of foreign bankruptcy trustees and administrators. We have been and will continue to pursue these assets vigorously, but recovery may be more uncertain and may take more 

time. 

Mr. Chairman, Mr. Ranking Member and members of the committee, thank you for the opportunity to testify here today. 

[The prepared statement of Mr. Kobak can be found on page 159 

of the appendix.] 

Mr. CANSECO. Thank you, Mr. Kobak. 

And now, we go to Mr. Thomas Baxter, general counsel, Federal 

Reserve Bank of New York. 

Mr. Baxter. 

STATEMENT OF THOMAS C. BAXTER, JR., GENERAL COUNSEL, 

FEDERAL RESERVE BANK OF NEW YORK 

Mr. BAXTER. Good afternoon Chairman Neugebauer, Ranking 

Member Capuano, and members of the subcommittee. Thank you 

for inviting me to appear here today. 

I am Tom Baxter, general counsel of the Federal Reserve Bank 

of New York, and I will speak about the New York Fed’s relationship with its primary dealers and, more specifically, our relationship with a former primary dealer, MF Global Inc. 

Let me start with a short summary of the New York Fed’s relationship with the regulated institutions that we designate as primary dealers. Our relationship with this group of 21 firms is a 

counterparty relationship, not a supervisory relationship. 

We are not a supervisor. Primary dealers serve as trading 

counterparties in the transactions that the New York Fed undertakes to implement monetary policy. As such, primary dealers are 

required to participate consistently as counterparties to the New 

York Fed in purchases and in sales of Treasury and agency securities. 

Primary dealers are also expected to provide the New York Fed’s 

trading desk with market information and analysis that is helpful 

in the formulation and implementation of monetary policy and to 

participate in the New York Fed’s auctions of U.S. Government securities on behalf of our Treasury. 

In evaluating whether a particular firm may be designated as a 

primary dealer, the New York Fed considers whether the firm has 

the experience and capability to meet the New York Fed’s unique 

requirements, which are different from the needs of other market 

participants. 

60 

As a result, the New York Fed has repeatedly and publicly stated 

that the designation of a firm as a primary dealer should not be 

regarded as a kind of Good Housekeeping Seal of Approval. And we 

have cautioned market participants that they should not take the 

primary dealer designation as a substitute for their own 

counterparty due diligence. 

Now, I will turn to the specific issues concerning MF Global. 

First, concerns have been raised about the New York Fed’s application process for primary dealers. More specifically, the question has 

been asked as to how MF Global became a primary dealer. 

The application process for primary dealers is governed by our 

primary dealer policy, which is published on our public Web site. 

The rigorous application process is designed to assist us in obtaining dealers who will satisfy our highly specialized needs. 

MF Global first expressed interest in becoming a primary dealer 

in December 2008. It was not until February of 2011, more than 

2 years later and hardly in a rush to judgment, that we designated 

MF Global as a primary dealer. In considering MF Global’s application to become a primary dealer, we followed our primary dealer 

policy to the letter. 

As my written testimony explains in detail, the substantial 

record evidence fully supported the New York Fed’s decision to designate MF Global as a primary dealer. 

Second, I would like to briefly address questions that have been 

asked about the prompt and progressive actions that the New York 

Fed took in late October 2011 as MF Global’s financial condition 

deteriorated abruptly and quickly. 

First, we mitigated exposure by excluding MF Global from certain primary dealer operations. 

Second, to protect us against potential exposure to MF Global, 

we asked MF Global to execute an agreement to post margin to the 

New York Fed, and it did post margin. 

Third, the New York Fed informed MF Global that MF Global 

was suspended from conducting new business as a primary dealer. 

Through these actions, we protected the taxpayer interest and we 

sustained no loss. 

On October 31st, following the initiation of a proceeding by the 

Securities Investor Protection Corporation, the New York Fed terminated MF Global’s status as a primary dealer. We also returned 

excess margin we had received from MF Global to the SIPC trustee 

in accordance with the trustee’s directions. 

Let me finish by thanking the subcommittee for holding this 

hearing. The New York Fed joins this subcommittee and its members in sharing concern for those customers of MF Global who have 

sustained losses as a result of the firm’s collapse. We at the New 

York Fed stand ready to assist the MF Global trustee and the Congress in their important roles in this matter. 

I am pleased to answer any questions you may have. 

[The prepared statement of Mr. Baxter can be found on page 91 

of the appendix.] 

Mr. CANSECO. Thank you, Mr. Baxter. 

And thank you, gentlemen, for being here today. 

At this time, I will yield itself 5 minutes for questions. 

61 

And I would like to begin by hearing from the CFTC and the 

SEC about regulatory coordination in the wake of Dodd-Frank. One 

of the big selling points of that bill was that regulators would work 

together, particularly through the FSOC, and in doing so, we would 

be able to avoid problems like the one we have at MF Global. 

So, Mr. Cook, last March the SEC began looking into the socalled window dressing of quarterly statements by MF Global, and 

it was known by that point that the company had significant exposure to the European debt crisis. At this point, what kind of communication was going on between the SEC and other agencies? 

And there’s a second part to my question. Was Secretary 

Geithner or FSOC notified and involved in the MF Global situation? 

Mr. COOK. Mr. Chairman, I am—I think the timeframe you are 

referring to, there may have been some ongoing review by our Division of Corporation Finance of some of the filings that were being 

made in the ordinary course. I’m not directly familiar with what 

questions they were raising; I think there were regular reviews of 

the filings. I’m not aware of any communications with other regulators at that time. 

Mr. CANSECO. Mr. Berkovitz, do you have any— 

Mr. BERKOVITZ. I would add that typically there is consultation 

and coordination between the two agencies on these types of matters. If there is not something that would raise red flags, though, 

then it wouldn’t necessarily be communication. 

Mr. CANSECO. Was any communication sent to the Secretary 

Geithner or the FSOC? 

Mr. BERKOVITZ. I couldn’t answer that in full, but I’m not aware 

of any. Throughout this period, I think that you are referring to in 

the review of the reports, that we had in the information that we 

obtained from our review of MF Global, as well as looking at the 

reports from the self-regulatory organization, we had not received 

any red flags that would be a major issue at that time. 

Mr. CANSECO. The Dodd-Frank statute states that one of the objectives of the FSOC is to facilitate information-sharing and coordination among member agencies. 

There were obvious problems at MF Global. Was FSOC doing its 

job here, do you know, Mr. Berkovitz? 

Mr. BERKOVITZ. I am from the CFTC. 

Mr. CANSECO. Right. 

Mr. BERKOVITZ. I would say, again, during that time period, 

based on the information that we had in terms of the money and 

the segregation accounts, that with respect to the issues that we 

look at with respect to MF Global, the protection of customer funds, 

how they were protecting customer funds, the daily reports that we 

were getting, the monthly reports that we had and that we had 

been obtaining from the self-regulatory organization from CME had 

not raised any red flags regarding the treatment of customer funds. 

So, in the normal course of business, absent red flags, it wouldn’t 

necessarily rise to something that the FSOC would have been notified of. 

Mr. COOK. If I could add, sir, when I was addressing your earlier 

comment, I was thinking of the earlier time period I think you had 

started your question with. When it became clear that there were 

62 

serious concerns with MF Global, there was a lot of discussion 

among various regulators. We were talking with the CFTC, the Fed 

Reserve Bank of New York, and the Treasury Department during 

that week about, and leading into the weekend about what was 

going on. 

FSOC has been talking about, and I don’t want to speak for 

FSOC, but— 

Mr. CANSECO. You are a board member of FSOC? 

Mr. COOK. Our chairman is one of the members. 

Mr. CANSECO. Yes, all right. 

And you, Mr. Berkovitz, you’re a member of FSOC, right? 

Mr. BERKOVITZ. The chairman of the CFTC is a member of the 

FSOC. 

Mr. COOK. FSOC had included exposure to European sovereign 

debt as one of the risk factors in its recent report assessing systemic risk, and obviously, after the bankruptcy filing, there was a 

call of FSOC on that day to discuss what the implications might 

be of this, of the bankruptcy. 

Mr. CANSECO. Mr. Ketchum, do you have any comments on that. 

You are also a member of—or your organization is a member of 

FSOC? 

Mr. KETCHUM. No, we’re not. To the best of my knowledge, no 

self-regulatory agency is a member of FSOC. 

Mr. CANSECO. All right. So you have no comment on that. 

There were obvious problems with MF Global. Do any of you 

have an opinion of whether or not FSOC was doing its job here? 

Mr. COOK. Sir, my view is that—my understanding that FSOC 

was really created primarily as a way to help monitor systemic 

risk, identify where there may be systemic risk and to deal with 

it. While the bankruptcy of MF Global is obviously a significant 

event and has caused enormous hardship for many individuals, it’s 

not clear to me that it fell within the framework of a systemic risk. 

That being said, I think some of the discussions post—on that 

call after the bankruptcy, there was a—it was recognized that this 

is an opportunity to learn lessons about what we—how we—the 

regulatory structure works and whether there’s any opportunities 

for further improvement. 

Mr. CANSECO. Let me ask you something, the purpose of the 

FSOC is also to facilitate information-sharing and coordination 

among the member agencies and other Federal and State agencies 

regarding domestic financial service policy development, rulemaking, examinations, reporting requirements, and enforcement 

actions, and these are the duties of the FSOC. 

So both of your organizations were duty bound to exchange information. And was that not happening with regard to what you were 

hearing from MF Global at the time? 

Mr. BERKOVITZ. We had exchanged information. We were in communication with the SEC, and our staff was in communication with 

FINRA as well. Through this period, up until the last several days 

that have been described, the daily segregation reports, the monthly reports, the reports that we were getting from our DSRO had 

not indicated there were issues with the customer segregated 

funds. 

63 

The absence of information coming to us from the reports from 

MF Global, from the DSRO, from our own review, and in the absence of information, this wouldn’t be something that necessarily 

we would pass on to the FSOC, as Mr. Cook stated. 

Mr. CANSECO. Thank you very much, gentlemen. 

I now yield 5 minutes to Mr. Capuano, the ranking member. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Mr. Chairman, I’m going to try to stick to the issues at hand. If 

you want to talk to FSOC, let’s get them in here. I think it’s a fair 

question to ask what they are going to do from this point forward, 

but they were put together for systemic risk. And this may or may 

not get to that point, but I don’t think anybody has suggested yet 

that it is. 

So, in the meantime, Mr. Kobak, I would like to start with you. 

I understand and totally 100 percent agree that your first and primary responsibility is to the customers. But for the sake of discussion, I also presume that as a bankruptcy trustee, you were collecting information on all creditors, not just customers, is that a 

fair assumption? 

Mr. KOBAK. That’s correct. Our primary emphasis at this point 

is on customers, both on the securities and commodities side. 

Mr. CAPUANO. I understand that. 

Mr. KOBAK. But we certainly have to do our duty for everyone. 

Mr. CAPUANO. But let’s assume for the sake of discussion that all 

customers—and I’m not suggesting that they can—but for the sake 

of this discussion, let’s assume that they can get to 100 percent of 

them. After the customers are paid, who is the largest creditor, to 

your knowledge, at the moment? 

Mr. KOBAK. I believe the largest creditor is probably JPMorgan. 

They were creditor of the holding company but also of us. 

Mr. CAPUANO. Do you have any idea—and again, I’m not trying 

to be— 

Mr. KOBAK. I know there was a very large revolving loan. I know 

they were the clearing bank. I’m not exactly sure what amount. 

Mr. CAPUANO. Millions, 500 million, a billion? 

Mr. KOBAK. Hundreds of millions. 

Mr. CAPUANO. Hundreds of millions. Okay, so it’s a regulated 

bank at the other end of this. Because the reason I ask is, as I understand it, when everything is said and done, where the collateral 

might come from, that’s fine, we’ll get into that in a minute with 

the CFTC. 

But in the final analysis, somebody had to loan money to get tie 

30-40-1 ratio, and it appears on a very cursory review, that money 

had to come from the outside, and it probably came—I won’t say 

probably—but at least in this case a significant amount of it came 

from a regulated entity. Is that a fair statement? 

Mr. KOBAK. I really don’t know, Congressman. We haven’t been 

there. We haven’t really done an analysis. 

Mr. CAPUANO. I’m not trying to jump ahead. I guess I’m jumping 

ahead because that’s what I have to do today. I think it’s—I personally think that’s where it’s going to end up. 

Mr. Kobak, have you looked at the auditors or have you looked 

at the credit rating agencies, have you looked at any of the other 

regulated agencies with the presumption being at some point, you 

64 

are going to have to go at everybody to try to get money from any 

place you can that is due to this company from anybody who might 

not have done their job? Have you started to look at them yet? 

Mr. KOBAK. Step one has really been to look at the accounts to 

see if we can identify what the transactions were. I think as Mr. 

Corzine was suggesting today, another part of that is probably 

looking at money that should have been coming in to see whether 

it all got there. That’s what we have been concentrating on today. 

We certainly will do the other things. 

Mr. CAPUANO. Mr. Baxter, do you know if the Fed has started 

looking at any of their regulated entities that might have been on 

the other side of these agreements? 

Mr. BAXTER. You know, ranking member, that I can’t talk about 

specific regulated institutions. 

Mr. CAPUANO. I’m not asking you to. 

Mr. BAXTER. But the answer to your question generically is we 

were looking at certain institutions, banking institutions, before 

the bankruptcy, and we have continued to look at them after the 

bankruptcy. 

Mr. CAPUANO. Because I will tell you that eventually, I, myself, 

am going to want to go to ask questions. I’m not expecting you to 

know the answers today. But to make this mess, there had to be 

two parties. One party might have been MF Global, maybe or 

maybe not doing something wrong, but there had to be another 

party. And if it’s another regulated entity out there giving loans in 

incredibly risky situations, this unfortunately sounds all too familiar, which I know it’s too early yet, but I just want to make sure 

that the Fed is aware that I, for one, am going to want to go down 

that road when the time is appropriate. 

Mr. Berkovitz, for the CFTC, you just last week I think it was, 

I might be a week off, changed regulation 1.25. But that regulation, 

that change has been pending since May of 2009. That’s 2 years 

it was officially put out there in October of 2010, but you have been 

dealing with this for 2 years. 

Do you think that maybe you kind of waited a little too long? 

Mr. BERKOVITZ. Congressman, the Commission, as you noted, 

published an advance notice of public rulemaking in May of 2009. 

We took the comments, the public comments we received on whether we should— 

Mr. CAPUANO. How many public comments did you get? 

Mr. BERKOVITZ. I think there were maybe— 

Mr. CAPUANO. Twelve. 

Mr. BERKOVITZ. Fifteen or something like that. 

Mr. CAPUANO. So 12, so it was not hundreds of thousands of public comments. 

Mr. BERKOVITZ. That’s correct. And we issued a notice of proposed rulemaking in October of 2010 at that time. Subsequently— 

Mr. CAPUANO. I understand that, but do you think that maybe 

you should have acted a little quicker? The only reason I ask is because clearly, this is the way that MF Global went through it. 

Whether they did it right or not, it’s clearly the incredible doors 

that were open by the CFTC through 1.25 to allow them to repo 

and double repo and hyper repo everything there was involved. 

65 

Now from what I see, and again, I’m still catching up here, it 

looks like you finally closed the door. And the truth is the fact that 

you closed the door a week after the bankruptcy raises even more 

red flags that you knew that there was an open door, and you knew 

you should have closed it earlier. And so I guess the question is, 

if you had closed it earlier, we wouldn’t be sitting here today. 

Mr. BERKOVITZ. All right, so I would like to clarify in terms of 

what regulation 1.25, the types of transactions it would allow and 

the types of transactions it does not cover. Regulation 1.25 covers— 

Mr. CAPUANO. So are you saying that MF Global has violated 

regulation 1.25? 

Mr. BERKOVITZ. No, Congressman, I’m saying that 1.25 covers 

what investment of customer funds may be, customer funds. 

Mr. CAPUANO. I understand. That’s why we’re trying to get back 

to customers, 1.25 is the regulation that for all intents and purposes enforces the so-called segregation of customer funds. But obviously, they weren’t segregated, otherwise we wouldn’t be looking 

for them. So, and as I understand it, everything I have read so far 

has indicated that MF Global went through 1.25, possibly legally, 

maybe not, not sure yet, to get at those funds in a way that was 

allowed by the CFTC. 

Now, whether they did it illegally is fine, but at least some of it, 

that door was open. And now that it’s closed, the fact that you 

closed it so quickly after the bankruptcy, certainly indicates to me 

that was the problem. And you have have now closed the barn door 

after the horse is gone, which is fine. So, for me, I would like to 

know what changed, why all of a sudden? Did somebody on the 

board change their vote? 

Mr. BERKOVITZ. Congressman, we, as I was describing, this has 

been a process. 

Mr. CAPUANO. I understand the process, Mr. Berkovitz. Why 

wasn’t it passed before the bankruptcy? You didn’t have the votes? 

Mr. BERKOVITZ. The Commission was considering it through the 

summer. 

Mr. CAPUANO. All of a sudden, they woke up on December 4th 

and said, ‘‘Oh, my God, we have to pass this today?’’ 

Mr. BERKOVITZ. There were a number of outstanding issues in 

the rule that the Commission was— 

Mr. CAPUANO. Do you realize how much this smells? This is like 

a dead fish sitting on the table to me. Because you—with the way 

you are implying it is that if this had never happened, somehow 

miraculously, on December 4th, they would have passed the change 

anyway, which, of course, is virtually impossible for me to believe 

since it had been hanging out there for 2 years. 

Mr. BERKOVITZ. There is nothing in the change or in 1.25 prior 

to the change which would have permitted a person to take customer out of segregated funds. The prohibition— 

Mr. CAPUANO. I am familiar with what 1.25 does. But I also understand what doors it opened up. It allowed them to be in sovereign debt. It allowed in-house repos, and you have now closed 

those doors, which I think is fine. As a matter of fact, as I understand it, Mr. Cook, you never opened those doors at the SEC, is 

that a fair statement, in-house repos and invading customers’— 

66 

Mr. COOK. The reserve account on the security side needs to be 

invested in cash or Treasuries. 

Mr. CAPUANO. You didn’t have this door open for the SEC side? 

Mr. COOK. I’m not—I don’t know exactly everything they permitted. 

Mr. CAPUANO. Okay. That’s— 

Mr. BERKOVITZ. If I could clarify, what 1.25 allowed before it was 

amended— 

Mr. CAPUANO. Mr. Berkovitz, I know what 1.25 did, but I also 

know how it was used, and that’s why the door was closed. You 

clearly saw it as an open door, and I think that’s fine, because it 

was, and I’m glad you closed it. 

But I have to tell you, it seems as though you were sitting on 

your hands for a year-and-a-half when you knew you should have 

shut the door. You knew there was a problem. Had you acted precipitously, we wouldn’t be here today because MF Global wouldn’t 

have been able to do this. That’s the way I read it, and I wouldn’t 

mind hearing a follow up at a later time, but have limited time 

here. I think I am already over my limited time, so I think I’m 

done even though I’ll be back. 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. Berkovitz, Commissioner Sommers told the Senate Agriculture Committee on Tuesday, ‘‘We have a very good idea at this 

point what happened to the money.’’ 

What happened? 

Mr. BERKOVITZ. Congressman, I think what Commissioner Summers was referring to was we have a very good idea of the initial 

transfers out of the segregation account. 

We have a lot of information about initially where that money 

went within the company. What we are continuing to look at, we 

are continuing to examine, is what was the nature of those transactions, what was the underlying purpose of those transactions, to 

what extent were they legitimate transactions, to what extent were 

they not legitimate transactions, and then, from there, what happened to those funds? So there are several other steps that we are 

looking at very, very closely to try and trace exactly where all that 

money went. 

Chairman NEUGEBAUER. Was there one particular entity that got 

a lion’s share of those transfers in the last day and hour? 

Mr. BERKOVITZ. I can’t speak to that. That’s where we’re continuing to try to trace these funds, and that’s an ongoing process 

that I can’t really speak to. It’s also part of our investigation. But 

we are, that is one of the questions that we are trying to track 

down. 

Chairman NEUGEBAUER. Thank you. 

Mr. Duffy, you heard Mr. Corzine testify today. When asked 

about a $175 million transfer that may have been classified as a 

loan to a U.K. subsidiary, and he denied actually knowing about 

those transactions, do you agree with that testimony? 

Mr. DUFFY. I can only tell the committee, which I told in the 

Senate, what I have been told. This committee asked for an explicit 

timeline of everything that CME Group knew, and we documented 

that and submitted it for the record. I think you submitted it earlier. 

67 

In there, it had references of our employees who were on calls 

where the other employees of MF Global said Mr. Corzine was 

aware of the loans of the $175 million to the European subsidiaries. So that is what I know about it, sir. 

Chairman NEUGEBAUER. Okay. And when you, I assume you all 

have been doing some postmortem of what went on as you’re trying 

to help, be a part of recovering those funds? 

Mr. DUFFY. We are not, sir, we are not allowed to do an investigation. The CFTC has asked us not to. 

Chairman NEUGEBAUER. Okay. So your hands are off it at this 

particular point. 

Mr. DUFFY. Our focus, as I said in my testimony, was CME 

Group put up $550 million to help the trustee put moneys back 

into the small farmers and ranchers, and that’s what we have 

done, sir. 

Chairman NEUGEBAUER. Thank you, sir. 

I think my friend from Texas—yes, I want to follow up on the 

testimony, I think the line of questioning about that interagency 

coordination. And I know that the SEC initiated some actions back 

in the summer, I believe, to require this entity to put up additional 

collateral; is that correct, Mr. Cook? 

Mr. COOK. Yes, sir, I just amplified that was initiated really by 

the front-line supervisors of FINRA and the CBOE, who initially 

identified the issue and then consulted with us and that resulted— 

Chairman NEUGEBAUER. When did you first get concerned about 

this issue with this entity? 

Mr. COOK. This particular issue was raised by FINRA and the 

CBOE, I think in the June, July timeframe. And there were a number of conversations during that timeframe. 

Chairman NEUGEBAUER. Mr. Berkovitz, when was kind of the 

first indication to the CFTC that there was a problem in MF Global? 

Mr. BERKOVITZ. It was the weekend, obviously—let me back up, 

the week of the 24th of October, after the downgrades, the ratings 

downgrades, the earnings statements, we became concerned about 

the protection of customer accounts and customer funds, so we sent 

people on site. I believe, it was the 27th of October. 

Chairman NEUGEBAUER. This was about 90 days later, and it 

was about the last week of the game. 

Mr. COOK. Sir, if I might just amplify it, because I think you 

were talking about the bankruptcy in the week beforehand. The 

capital charge issue that came up in August was one that was discussed to clarify what are the facts, understand what are the issues 

and to ultimately reach a final determination where the firm was 

told they needed to take the charge. At the time, I understand the 

SEC staff did inform the CFTC staff about the issue that a capital 

charge was going to be taken. Under the normal rules, when someone has to take a capital charge of this nature in a way that suggested their capital charges earlier were inadequate, they have to 

file a notice to their regulators, which I believe they did, which 

would be to us and to the FINRA and to the CFTC. And then they 

were forced to restate their report, their financial report, which 

would then be filed with us and the CFTC all in the August, early 

September timeframe. 

68 

Chairman NEUGEBAUER. I want to go back to what you just said, 

Mr. Berkovitz, though you didn’t acknowledge that August date. 

You said we became aware the problem was in the first week— 

Mr. BERKOVITZ. I think I answered a different question than the 

one you asked, and I apologize for that. Mr. Cook is correct, we 

were told about the capital issue in early August, when we were 

informed of the issue and the resolution of that issue at that time. 

So we were aware of that in the early August timeframe. 

Chairman NEUGEBAUER. Okay. I thank the gentleman. 

Mr. Perlmutter? 

Mr. PERLMUTTER. Thanks, Mr. Chairman. 

It will be interesting, as the weeks and months go by and all of 

these facts really do unfold, because there are several sort of major 

things that I am concerned about. And I would like to first just sort 

of understand the process. Mr. Ketchum, you said we need to be 

able to get our hands on this quicker. But if I am not mistaken, 

the SIPC steps in and they can freeze everything by filing a bankruptcy. That is how we protect customers of broker-dealers. 

Mr. KETCHUM. Congressman, the ultimate protection for customers of broker-dealers when there is a bankruptcy and liquidation is SIPC and the trustee, and should be. In many circumstances 

where a firm is in financial trouble, the regulators working with 

the firm are able to identify either transfer accounts or the sale of 

the firm, which avoids having customer accounts frozen and avoids 

the variety of impacts that come from SIPC liquidation. So we try 

to avoid that whenever we can. 

Mr. PERLMUTTER. That is sort of the last straw. 

Mr. KETCHUM. Absolutely. 

Mr. PERLMUTTER. Okay. But in advance of that, you are saying 

you would like to be able to have some authority to force a sale or 

to protect—because it sounded to me like you are getting weekly 

sort of updates, and you guys got nervous a week or two in advance 

of the trustee stepping in and closing the company. 

Mr. KETCHUM. We, of course, as you recall from my testimony 

and from Mr. Cook’s earlier, we became concerned over the positions after the quarterly statement at the end of May, and made 

the initial request with CBOE for additional capital to meet the 

capital requirements we thought applied. With the support of the 

SEC, that finally occurred in August. 

We continued to monitor the firm. As time went on, the position 

didn’t change. What changed over time was the gradual public recognition of the size of the position in foreign sovereign debt that 

the firm had, and with that, the ratings impact and the eventual 

withdrawal of liquidity support to put the firm into its spin in the 

last week. 

So we were very concerned about that. It was entirely working 

together with the other self-regulatory organizations and with the 

SEC. No, I don’t think it is a matter of additional authority. It simply is the concern when you have a firm that takes a very substantial position. 

Mr. PERLMUTTER. In hindsight, somebody should have put them 

into bankruptcy a week before this. Maybe we would have saved 

that $900 million that seems to be floating around. Really, I am 

just trying to understand this because I am very concerned. This 

69 

feels like deja vu all over again to me. Okay? And, Mr. Duffy, you 

and I have had conversations about CME and about how this 

would be the first time that money was lost from segregated accounts. I was counting on you guys sort of in this. And I appreciate 

that the CME has put up $550 million, which is towards the assistance to the customers. How does this happen? You clear twice a 

day. You see who has money and who doesn’t. 

Mr. DUFFY. It is very disturbing, sir. You and I have had many 

conversations. And I think one of the reasons you saw my testimony the way it was, it was a timeline to show that we were getting falsified segregation reports. And as we tied the segregation 

report out from Wednesday going into Thursday, Friday, the money 

was there as of Wednesday for the most part, 80 to 90 percent tied 

out. So something happened on Thursday or Friday. We were doing 

everything possible to do it. We have 50 auditors; we spend $11 

million a year doing this. We audit every firm each and every year. 

We do spot audits. We do surprise audits. We have done things to 

make sure our system never fails. Our system has never failed in 

75 years. In our opinion, someone has violated the law here. And 

it is hard to have a cop on every street. 

Mr. PERLMUTTER. If somebody—if there is an embezzlement, a 

fraud, whatever, we have to just deal with it. The FBI is in this. 

But I was hoping that the system with that was in place, especially 

through— 

Mr. DUFFY. The system didn’t fail, sir. 

Mr. PERLMUTTER. All right. So as this unfolds, I want to see that. 

Mr. DUFFY. I am trying to show that in my testimony. 

Mr. PERLMUTTER. Now, I would like to turn my question to Mr. 

Baxter, because here you have this primary dealer, MF Global. I 

don’t remember if Lehman Brothers was a primary dealer. I think 

it was. In monitoring these guys who are doing deals with you, you 

started getting nervous. You cut them off in earlier October. Mr. 

Ketchum was nervous about things over the course of the summer 

through August. Maybe the books were getting cooked. We have 

two regulators over there. And finally, the bankruptcy trustee 

comes in, boom, locks it down, is able to return $4 billion, which 

is 72 percent as of today. 

I am curious, and this is where Mr. Capuano was going, did the 

banks come in—and if they did, they were doing their job—and 

sweep all the cash that then left the customers holding the bag? 

Mr. BAXTER. Let me review some of the— 

Mr. PERLMUTTER. I said a lot there. I apologize. 

Mr. BAXTER. And I hope I don’t replicate that. 

Let me review some of the activities of the New York Fed during 

the week of October 24th, which was the week preceding the bankruptcy. It started with a downgrade on Monday, the 24th. The next 

day, there was a large loss declared by MF Global. And already in 

the market there were rumors—and not only rumors, they were 

confirmed—about the large position taken in sovereign debt by MF 

Global. 

What those three things did, Congressman, is they acted together 

to generate a loss of confidence that started a run on MF Global. 

And the run that went on MF Global really went on the funding 

side. And MF Global funded itself in the repo market the same way 

70 

that Bear Stearns funded itself in March of 2008. You will recall, 

Congressman, that the run began on March 11th, and by March 

14th, Bear Stearns had no liquidity. 

Mr. PERLMUTTER. Right. 

Mr. BAXTER. Similarly with Lehman, which you mentioned, the 

run began on September 9, 2008, and, again, it began on the repo 

side of the book, and by September 12th, that Friday, the Lehman 

Brothers broker-dealer was out of liquidity. 

So a part of what you see happening here relates to the funding 

and relates to funding assets that are not liquid. So what you see 

happening is the run starts abruptly, and it is vicious in its downward spiral on these firms. So consequently, when we saw what 

was happening early in the week on October 24th, on October 26th, 

I called my counterparts at the Commission, and one of my colleagues called counterparts at the CFTC, and said, given what we 

have seen in other recent experience, we think that we ought to be 

picking up the pace with respect to our crisis management with respect to MF Global. So with respect to the earlier questions about 

communication among the governmental entities, including the 

Fed, there was, I think, good communication that we had a crisis 

on our hands. 

Now, turning for just a minute to the other piece of this question, 

which relates to the secured parties and the unsecured parties, I 

want to make three points, Congressman, because we were one of 

those secured parties that protected themselves and protected the 

American taxpayer. 

Mr. PERLMUTTER. You said you had extra margin. 

Mr. BAXTER. Yes. And I want to make three points of what we 

did. And by making these points, I don’t want to in any way come 

across as insensitive to those who lost money by reason of this 

bankruptcy. But for the purpose of this hearing today, I think there 

are three important points as to why we avoided a loss. 

First, our margin account was on our books, and we controlled 

it. It wasn’t on the books of MF Global. All right? Second point, we 

received margin in the form of cash, and the proceeds came in, in 

a wire transfer of funds. And there was absolutely no evidence, in 

looking at that $4.2 million wire transfer, that it in any way connected to any customer funds. Third point, and perhaps the most 

important, we had an express representation in writing from MF 

Global that the property transferred to us as margin was MF 

Global’s own property. If that representation turns out to be false, 

a Federal criminal offense has been committed. 

Mr. PERLMUTTER. And the gentleman sitting next to you will 

come and collect that money. 

So with that, I would yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

I recognize the gentleman from Florida, Mr. Posey. 

Mr. POSEY. Thank you very much, Mr. Chairman. 

First for Mr. Kobak, both you and Mr. Giddens in your previous 

testimony, I believe, stated that no matter the exact size of the 

shortfall, speaking of segregated funds, its probable size is significant and will substantially affect the trustee’s ability to make a 

100 percent distribution to former MF Global, Inc., customers. Is 

that still your opinion today? 

71 

Mr. KOBAK. Yes, it is, unfortunately. 

Mr. POSEY. And thank you for just the yes-or-no answers. They 

are very rare around here, and we really do appreciate it. 

I know that you do not want to speculate while your investigation is still under way, but based on Mr. Duffy’s testimony and 

other reports, it seems highly probable that customer funds were 

transferred out of segregated accounts and commingled with MF’s 

own funds—I don’t think anybody is doubting that at this point— 

probably to meet margin calls on European bond positions. Does 

that— 

Mr. KOBAK. That is certainly something we are looking into. 

Mr. POSEY. Okay. Assuming for the moment that is, in fact, what 

happened, it would mean that the missing customer funds will 

never be found in some overlooked or unreported account somewhere, as had been hoped for by many customers when they first 

discovered that a substantial sum of money was missing from their 

accounts, because if the money was being used to back those bond 

positions, we know that those bonds were sold in mid-November, 

correct? 

Mr. KOBAK. That is our suspicion as well. It doesn’t mean we are 

not looking at it carefully. We stay up late at night thinking of— 

Mr. POSEY. We take ‘‘yes’’ for an answer around here. Thank you. 

According to a detailed report in the Wall Street Journal, those 

bonds were sold at a loss, and at an additional discount or bargain 

price, so to speak, to buyers that included JPMorgan Chase and 

George Soros. Have you seen the reports in the Wall Street Journal? 

Mr. KOBAK. I have looked quickly at the Wall Street Journal, 

yes. 

Mr. POSEY. All right. Thank you. 

I know you are not responsible for dealing with the bankruptcy 

proceedings for MF Global, but is it true that once the wall has 

been breached between customer segregated funds and corporate 

funds, the money could have been moved via a whole range of 

intracompany transactions, internal repos, etc., to virtually any 

part of MF Global or to the counterparties who were financing 

those bond positions? 

Mr. KOBAK. If the question is, is it possible, I believe it is possible. Whether it happened or not, we don’t know. That is what we 

are looking at. 

Mr. POSEY. ‘‘Possible’’ is fine. 

It strikes me that what we have here is a situation where the 

segregated funds belonging to MF Global, including the honest, 

hardworking families in my district’s money, were misappropriated 

to support a way too big speculative bet by Mr. Corzine and the 

board at MF Global. Since the bet was closed at a loss in a transaction that I believe needs to be investigated further, we could be 

looking at an absurd and totally unjust situation in which money 

has been taken from customers’ pockets only to find its way into 

the pockets of big bankers and hedge fund managers. 

I know that you need time to do your work, and you have no 

right to interfere with the bankruptcy proceedings. That is the responsibility of the Judiciary Branch, obviously. But if this committee can find a way to help reverse the travesty, obviously that 

72 

is what we want to do. And that is in large part why we are here 

right now. It is just essential, obviously, to protect the sanctity of 

segregated accounts if we are ever going to restore confidence to 

the commodity markets and the U.S. markets in the future. 

Final question: Mr. Capuano poses a really, really interesting 

question. Let me just frame this a little bit differently. Is it true 

that JPMorgan was one of the main depository banks for customers’ segregated bank accounts? 

Mr. KOBAK. I believe it was a depository, but any funds that 

they—I am not actually sure it was a customer bank. And we have 

gotten from virtually all the domestic depositories the funds they 

were holding. It is really the foreign funds that are our problem. 

Mr. POSEY. Okay. And they were also the providers of the main 

line of credit to MF Global, over a billion dollars? 

Mr. KOBAK. There was a substantial line of credit, I think, to the 

holding company, and I think it was on behalf of a syndicate of 

banks. But JPMorgan, I believe, was the lead of that syndicate. 

Mr. POSEY. Okay. And they would probably be unable to recover 

all of those loans if customers were made whole. 

Mr. KOBAK. I don’t know whether that is true or not at this time. 

Mr. POSEY. Possible? 

Mr. KOBAK. It is possible. 

Mr. POSEY. Probable? 

Mr. KOBAK. I would say possible. 

Mr. POSEY. All right. We will settle on possible. 

JPMorgan and Soros purchased the MF bonds in mid-November; 

is that correct? 

Mr. KOBAK. That is what I read in the paper. 

Mr. POSEY. That is what the article says. By then, everyone in 

the world was well aware of a missing $1.2 billion in customer 

funds, correct? 

Mr. KOBAK. I certainly was aware of it. I assume others were. 

Mr. POSEY. Okay. Do you think they should be concerned about 

the possibility of buying stolen goods? 

Mr. KOBAK. I really don’t know what the circumstances of those 

sales were. 

Mr. POSEY. Mr. Baxter, do you? Yes or no would work. 

Mr. BAXTER. There are provisions in law for a bona fide purchaser, and those transactions, which I don’t remember as vividly 

as perhaps I wish I did, Jim, and you may help, but I think the 

bankruptcy court might have approved some of those transactions. 

And I assume the bankruptcy court would not have approved 

transactions if the bankruptcy court felt they were violative of law. 

Mr. POSEY. Mr. Ketchum? 

Mr. KETCHUM. I know no more with respect to the liquidation, 

Congressman, than that. I do have some recollection that there was 

approval of those transactions from reading the story, but I know 

nothing more directly. 

Mr. POSEY. Okay. Mr. Duffy? 

Mr. DUFFY. I have no other knowledge other than what I read 

in the paper also, sir. 

Mr. POSEY. Mr. Cook? 

Mr. COOK. I have nothing further, sir. 

Mr. POSEY. Mr. Berkovitz? 

73 

Mr. BERKOVITZ. I can’t really comment on where the money, 

where the transactions really may have gone. We are trying to 

trace these, and we are trying to get the money back. 

Mr. POSEY. Do you think it would be reasonable for customers to 

expect some clawback? Starting with Mr. Baxter. 

Mr. BAXTER. Again, there are protections in law for transferees 

who are bona fide purchasers and have no knowledge that the 

property they are acquiring has in any way tainted in title or otherwise. And I don’t know the facts, Congressman, as to what the 

purchasers may or may not have known. 

Mr. POSEY. If the purchase had been made after everyone was aware you have $1.2 billion missing, I think even the most extraordinarily naive person would say there is $1.2 billion missing here 

somewhere, I wonder why I am getting such a bargain on this. 

Mr. BAXTER. And perhaps Mr. Kobak is more familiar to answer 

this than I am, but we have worked in a couple of bankruptcies together, and oftentimes it is important to be able to liquify some assets, particularly if the market is declining and those assets are 

losing value. So you shouldn’t jump to the conclusion, Congressman, that a sale is necessarily bad for the bankruptcy estate. It 

wasn’t for some of the estates that I acted as liquidator for, and 

I suspect that Jim would agree with me on this. 

Mr. POSEY. And again, I am trying to think of customers first, 

just like the customer advocate is supposed to think of customers 

first. And I can’t help, as far removed as it is—I can’t help but be 

reminded of Madoff, and I can’t help but be reminded of how effective the clawback has been for some of those poor people who were 

exploited by Madoff. And I am just trying to get an idea if there 

is a possibility here. Maybe there is not. But it was just an interesting concept brought forth. 

Could I get a response from any of those others? I think they are 

all going to plead ignorance on this, but— 

Chairman NEUGEBAUER. There will be lightning answers here, 

please. 

Mr. KOBAK. Okay. I don’t know if I would call them clawbacks. 

There are legal theories that you avoid transfers, you can attack 

transactions. That is what we are going to look into. I am not sure 

if the transaction you are talking about is specifically our transaction, but it is certainly something we will be looking into. But we 

have to find a basis, a cause of action. If we find it, I can assure 

you we will pursue it very diligently. 

Mr. POSEY. Okay. 

Mr. KETCHUM. I neither have the facts nor the bankruptcy expertise to be able to speculate, Congressman. 

Mr. DUFFY. I don’t have the expertise, but I will say one thing. 

I think that if customer segregated funds are the ones that are 

missing, they do not have SIPC protection or other things of that 

nature, I believe that they should be first in line in any circumstance whatsoever to get this money back. 

Mr. POSEY. Thank you, Mr. Duffy. I do, too. 

Mr. COOK. I don’t have the specific facts, and I am not a bankruptcy expert. I think your original question was would it be reasonable for a customer to look for clawback? And I think if I were 

a customer, I would want every possible avenue to be pursued vigVerDate Nov 24 2008 18:25 Jul 16, 2012 Jkt 072635 PO 00000 Frm 00079 Fmt 6633 Sfmt 6633 K:\DOCS\72635.TXT TERRIE
74 

orously. I don’t know whether there is—I don’t know the technical 

details of the law here to be able to know whether there is hope 

that would occur here. 

Mr. BERKOVITZ. We are absolutely committed to getting customer 

money back to the customers. 

Mr. POSEY. Thank you. 

Thank you, Mr. Chairman. 

I yield back, and I thank you for the extra time. 

Chairman NEUGEBAUER. Mr. Miller is recognized. 

Mr. MILLER OF NORTH CAROLINA. Thank you. I want to make another try at the questions that I asked earlier of the first panel, 

without satisfactory results, maybe because of my questioning, 

maybe because of their answering. As I understand it, MF Global bought more than $7 billion of European sovereign debt, which was 100 percent financed through the 

repo market. The sovereign debt itself was the collateral, which is 

pretty stunning. Mr. Capuano earlier asked how they got to 40-to1 leverage. Maybe that was how. But at some point, the lenders figured out that was maybe not such a good idea, either because of 

the debt, or the sovereign debt that was pledged as collateral, or 

because of MF Global, and they issued a margin call, and then 

there began a mad scramble to come up with the money. They sold 

assets. And then I think Mr. Baxter, and before that Mr. Abelow, 

said that what happened was a classic run like used to happen to 

a depository institutions, if you know the movie, ‘‘It’s a Wonderful 

Life.’’ The other lenders decided that they maybe needed a little 

more security, too, and it went downhill from there. 

But in the mad scramble, the question is what happened to the 

money or to the assets that were in clients’ segregated accounts? 

The reality is that segregated accounts get used all the time. It is 

supposed to be segregated, yes, but they can get at those accounts. 

A Reuters article a week ago set out verbatim a paragraph in MF 

Global’s client contract: ‘‘Consent to loaner pledge. You hereby 

grant us the right, in accordance with applicable law, to borrow, 

pledge, repledge, transfer, hypothecate, rehypothecate,’’ and on and 

on. Mr. Corzine said, yes, but there were limits to that under 

CFTC. 

But the question is—I guess for Mr. Berkovitz—was it legal? 

Was there a legal way for MF Global, under the CFTC rules that 

existed at the time, to use assets in client accounts as security for 

any kind of short-term loan for MF Global? And whether it was 

legal or not, is there a reason to think that might have happened? 

Mr. BERKOVITZ. I can’t speak to what MF Global did or what 

they didn’t do. That is the matter that we are currently looking 

into. What I can say is under our regulations, the customer funds 

remain the property of the customer, and they can’t be pledged to— 

on behalf of the company as security for a loan or something like 

that. 

Mr. MILLER OF NORTH CAROLINA. It could not legally have been 

done? 

Mr. BERKOVITZ. Correct. 

Mr. MILLER OF NORTH CAROLINA. And you cannot speak to 

whether there is reason to think—any evidence that did, in fact, 

happen. 

75 

Mr. BERKOVITZ. I can’t speak to anything that they may or may 

not have done factually. 

Mr. MILLER OF NORTH CAROLINA. Okay. And then, several Members have asked questions about whether there was a way to structure the transaction so they could, in fact, borrow funds in clients’ 

accounts, whether through internal repo or whatever. Was there, in 

fact, a legal way with the CFTC rule that was in effect at the time 

for them to borrow from their own clients? 

Mr. BERKOVITZ. Under the regulation 1.25 in effect at the time, 

they could have done an internal repurchase agreement. But the 

customer segregated funds would have to remain intact and whole 

at all times. The value of the customer funds would have to be preserved. They could not reduce the value of those funds or take customer funds. 

Mr. MILLER OF NORTH CAROLINA. They could borrow from them 

and offer something as collateral? 

Mr. BERKOVITZ. I wouldn’t say ‘‘borrow from.’’ 

Mr. MILLER OF NORTH CAROLINA. It is a repo transaction. 

Mr. BERKOVITZ. It is a repo transaction where they are putting 

something of equal value back into the customer account. 

Mr. MILLER OF NORTH CAROLINA. Okay. And was the thing of 

equal value, was there a way that they could have created an instrument on their loan that would have been permissible collateral 

for repo transactions? 

Mr. BERKOVITZ. They would only have been able to do that with 

permissible investments under the regulation. They could only use 

a repo transaction with permissible investments. 

Mr. MILLER OF NORTH CAROLINA. And can you speak to whether 

there is reason to think something like that happened? 

Mr. BERKOVITZ. I can’t speak factually to that. 

Mr. MILLER OF NORTH CAROLINA. Okay. Again, a couple of people 

have used the term ‘‘run on the banks.’’ That used to happen to depository institutions all the time, and then we had safety and 

soundness regulations, and then we had deposit insurance. It 

hasn’t happened in 70 years really. Before the financial crisis, we 

had a repo market, a shadow banking system that was equal in 

size to all bank deposits. Stunning amounts of money were sloshing 

around every night. Bear Stearns was borrowing $40 billion a night 

in the repo market. There was a run on Bear Stearns, there was 

a run on Lehman, there was a run on the entire financial system 

in that week after that Lehman collapse. Now, it has happened 

again. 

Is there reason to think that maybe this completely unregulated 

shadow banking system that actually no one in Congress knows 

much of anything about, but seems to create a remarkable instability for our entire financial system, that maybe we ought to pay 

attention to that; there ought to be some limitation on how many 

times a given asset can be made collateral, and then collateral 

again, and then collateral again, or there should be some required 

haircut so there is a limitation on how much can be borrowed? Is 

there some reason to think there should be some limitation, or 

should this just go on the way it has over the last 3 or 4 years? 

Mr. Duffy, do you want to answer a question? 

76 

Mr. DUFFY. I won’t answer on behalf of CME. I will answer it 

on behalf of myself. 

I absolutely think you are correct. I think there needs to be some 

reining in of this type of activity. One of the things that Mr. 

Corzine kept saying was he was bringing leverage ratios down from 

37 to 30. He failed to say that he also took the debt from $1 billion 

to $6.3 billion, too. So there are a couple of other things in there. 

I do believe, and this is me speaking personally, that these leverage ratios need to be adjusted. 

Mr. MILLER OF NORTH CAROLINA. Okay. Actually, I think all of 

you were equally qualified to speak to this, but, Mr. Berkovitz, how 

about you? 

Mr. BERKOVITZ. I can’t really speak to the issue on shadow banking, although I would note that under Dodd-Frank, there are a 

number of additional measures to reduce systemic risk, to increase 

transparency in the marketplace for a variety of swap transactions. 

But I can’t really speak to questions of shadow banking. 

Mr. MILLER OF NORTH CAROLINA. Mr. Baxter? New York Fed is 

deeply involved in all this stuff. 

Mr. BAXTER. Thank you, Congressman. 

One additional point I would note in terms of references to 

banks, banks also fund short term with respect to deposits, and 

they fund longer-term assets like loans. But banks, of course, have 

access to the liquidity facilities of the Federal Reserve. 

Mr. MILLER OF NORTH CAROLINA. Right. 

Mr. BAXTER. The shadow banking system, which consists of 

nonbanks primarily, broker-dealers, they do not have access to the 

discount window at the Federal Reserve. And as you may recall, 

one of the changes effected in Dodd-Frank is some of the provisions 

that we used—and I am speaking here about Section 13, subdivision 3 of the Federal Reserve Act to lend to broker-dealers—that 

provision was changed to make it much more difficult for the Fed 

ever to loan to a single company that was facing insolvency, or a 

single company for the purpose of taking assets off the balance 

sheet like we did with respect to Bear Stearns. 

So that is one point I would make to you right off the bat, is 

there is a difference, because the banking system has access to the 

liquidity facilities of the central bank, whereas the shadow banking 

system generally does not. Now, that is a generalization. There are 

some exceptions. 

Second point: Just by way of historical reference, you mentioned 

Lehman. You may also remember that the week after Lehman, 

there were several prominent investment banks, and I won’t name 

names because I shouldn’t, that became— 

Mr. MILLER OF NORTH CAROLINA. There weren’t that many. 

Mr. BAXTER. —that became bank holding companies. 

Mr. MILLER OF NORTH CAROLINA. Right. 

Mr. BAXTER. And again, the reason for that relates to this structural feature of having access to the liquidity facilities at the central bank. 

Mr. MILLER OF NORTH CAROLINA. Mr. Chairman, I know, but one 

more question along my earlier lines about the way that a transaction could have been structured to borrow money from client segregated accounts. Could MF Global have issued any kind of instruVerDate Nov 24 2008 18:25 Jul 16, 2012 Jkt 072635 PO 00000 Frm 00082 Fmt 6633 Sfmt 6633 K:\DOCS\72635.TXT TERRIE
77 

ment on their own, a bond, commercial paper, whatever, that 

would have been an asset that they could have used in an internal 

repo and borrowed the client’s funds? 

Mr. BERKOVITZ. I won’t speak to MF Global, but I will just 

speak—hypothetically speaking, you could put a corporate—a highly rated corporate bond could be a subject of a repo. 

Mr. MILLER OF NORTH CAROLINA. Your own corporate bond? 

Mr. BERKOVITZ. You couldn’t put your own bond in. You could 

not put your own bond in. 

Mr. MILLER OF NORTH CAROLINA. Okay. All right. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from Ohio, Mr. Renacci, is recognized. 

Mr. RENACCI. Thank you, Mr. Chairman. 

Mr. Baxter, MF Global’s application to become a primary dealer 

with the Federal Reserve Bank of New York was approved despite 

the firm’s history of compliance failures, internal control problems, 

and incomplete disclosures to regulators. Apparently, compliance 

problems and poor recordkeeping continued at MF Global until the 

firm’s collapse. If the New York Fed had a surveillance provision 

for primary dealers in place, do you think weaknesses in MF 

Global’s books would have been caught? 

Mr. BAXTER. The first point, Congressman, is we were not acting 

as MF Global’s supervisor; we were acting as MF Global’s 

counterparty. And as MF Global’s counterparty, we were concerned 

about our financial risk, and we were concerned about our 

reputational risk. That is why it took the application of MF Global 

more than 2 years to be approved. 

And with respect to reputational risk specifically, one of the concerns arose from the enforcement action that the CFTC did in December of 2009 against MF Global. And under our policy, the institution facing a material enforcement action goes into a kind of penalty box period for a period of a year. We put that MF Global application through that full 1-year penalty box. We checked to make 

sure it had remediated the enforcement problems that resulted in 

the 2009 action, and there were no new problems during that 1- 

year penalty box period. And as a result of that, in February of 

2011, so more than a year from the date of the enforcement action, 

we decided to approve the designation of MF Global as our 

counterparty. 

Mr. RENACCI. What was that date again? I am sorry? 

Mr. BAXTER. It was February 2011. 

Mr. RENACCI. Okay. And was there any review past that? Was 

there any surveillance past that? 

Mr. BAXTER. Past that, we continued to receive weekly FR 2004 

reports from MF Global. We continued to receive the monthly 

FOCUS reports from MF Global. We continued to meet regularly 

with MF Global staff. And most importantly, we were transacting 

business on behalf of the government with MF Global and looking 

at their trading activity done through us. 

Mr. RENACCI. And in those reports you were receiving, subsequent to that, were you seeing any weakness in MF Global? 

Mr. BAXTER. What happened after the date we approved it, so 

February of 2011, is these repo-to-maturity trades in European sovereign debt were put on. To the credit of FINRA, FINRA discovered 

78 

those in the summer of 2011. They were reported to us by MF 

Global in late July of 2011. And we were looking at the situation 

at MF Global throughout that period. 

Now, we have two particular capital requirements for primary dealers. One is a minimum capital requirement of $150 million. 

That was always satisfied. The other is that our primary dealers 

need to satisfy the SEC net capital rules. And after the experience 

through the summer of 2011, MF Global brought itself into compliance with the SEC net capital rules. So there was no problem 

under our policy, which we apply evenhandedly across all 21 dealers. 

Mr. RENACCI. I noticed you used the word ‘‘counterparts.’’ And I 

guess I would question why it is necessary for the Federal Reserve 

Board of New York to designate a select firm of group of firms as 

primary dealers if the New York Fed maintains that its primary 

dealers are only counterparts? 

Mr. BAXTER. We impose specific burdens on the 21 institutions 

that we designate as primary dealers: one, they have to participate 

in our trades in the open market to implement monetary policy; 

two, they have to provide us with market intelligence related to our 

monetary policy function; three, they have to participate in every 

auction we conduct on behalf of the Treasury for U.S. Treasury securities; and four, they have to be ready to make markets for us 

for the $3 trillion in assets we have under management for foreign 

central banks and monetary authorities, dollar reserves. So there 

are burdens that every one of the primary dealers has to agree to. 

And so, not every primary dealer can experience those burdens, 

and there are situations, Congressman, where primary dealers 

withdraw and can no longer satisfy our very specific requirements. 

But they are our requirements. They are our requirements because 

of the types of counterparty activities we engage in. And they assure that the primary dealers that are designated meet the needs 

of the Fed and the United States. 

Mr. RENACCI. Last but not least, do you monitor any of the communications released by the primary dealers which reference their 

status as primary dealers? Given the market perceptions about primary dealers, wouldn’t it be wise for the Federal Reserve Bank of 

New York to compel all primary dealers referencing their primary 

dealer status in oral or written communication to explicitly disclose 

that a primary dealer designation does not constitute an endorsement by the Federal Reserve? 

Mr. BAXTER. I hear that suggestion, Congressman. And, on our 

Web site, we publish prominently that the primary dealer designation should not be regarded as a substitute for counterparty due 

diligence. But I hear your suggestion that maybe we should do 

more and monitor what all of the 21 are saying. Now, that is a significant burden on us, but maybe it is a burden we need to undertake. So I will take that under advisement, sir. 

Mr. RENACCI. All right. Thank you. I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

So we are going to do a lightning round. I don’t know who our 

timekeeper is here, but we are going to do a 2-minute round. So 

I ask the Members to pick the question they want to ask, and I 

would ask our panel to be brief in their answers. 

79 

With that, I recognize the ranking member, Mr. Capuano, for 2 

minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

I don’t need a response to this, Mr. Berkovitz, but this is a CRS 

report dated November 28, 2011, on MF Global. And in a footnote 

on page 2, which is ridiculous it is this small, they are talking 

about segregated accounts can’t be commingled. But they also cite 

Section 4(d)(f)(3)(a) that has an exception permitting commingling 

‘‘for convenience.’’ 

I don’t expect you to answer that today, but I would like to hear 

from you at some point in the future as to exactly how big of a 

loophole that might be. Not today. Another time. But it certainly 

raises questions. And I ask it really only because I have such high 

regard for the CRS, if they put something in there, it raises my 

concern. 

I guess for the entire panel, I don’t expect that you will be familiar with an article, but I haven’t read a news article as often, as 

frequently I have read this one. I have read it 3 times now—actually 4 times, very slowly, because it is very difficult. It is above 

where I am capable of understanding. But it is a Reuters article 

entitled, ‘‘MF Global and the Great Wall Street Rehypothecation 

Scandal.’’ It was published on December 7th by a Christopher Elias 

out of the U.K. And I am not going to suggest anything here is accurate, but I would like you all to go back and take a look at this 

later on, and I would love to have some of your comments on this 

to see what you think he says. 

The reason I mention it is it goes through a long explanation, 

which I have to admit I have a hard time following—this is above 

my pay grade, but I am trying—is that—on some really serious 

questions. I will read you one paragraph near the end. After he 

talks about rehypothecation, which, I have to be honest, I am still 

struggling exactly what that is, but it is basically loans on loans, 

‘‘With collateral being rehypothecated to a factor of four, according 

to IMF’s estimates, the actual capital backing banks’ 

rehypothecation transactions may be as little as 25 percent. This 

churning of collateral means that the rehypothecated transactions 

have created enormous amounts of liquidity, much of which has no 

real asset backing.’’ 

Now, I have to be honest, that sentence reads like something I 

read not too long ago about mortgages, and it concerns me deeply. 

And he goes on in the next page listing big companies that, in his 

estimation, have taken advantage of weak collateral rules, incredible leverage by pledging and repledging collateral. And he lists 

JPMorgan as having sold or repledged $410 billion of collateral received under customer margin loans, derivative transactions, securities borrowed, and reverse purchase agreements; Morgan Stanley 

at $410 billion; and interestingly enough, Interactive Brokers at $8 

billion. They are the ones you were trying to sell MF Global to. 

And again, I am not trying to bushwhack you, but I would really 

love you each to take a good look at this and let me know what 

you think about this article and why you think I shouldn’t be concerned. And I would specifically ask that those of you who are on 

the FSOC bring this article back to the FSOC and ask them, because again, the FSOC, in my estimation, was created very clearly, 

80 

unequivocally, to make sure that there was no systemic risk. This 

article raises concerns it may be there, and nobody is watching. So 

I look forward to your responses. 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. Ketchum, I wanted to go back to something. In late September of 2010, I think you all did a call-around asking firms if 

they had sovereign debt exposure in Europe. And can you tell me 

what the response from MF Global was in that September 30th 

call-around? 

Mr. KETCHUM. Mr. Chairman, I don’t recall whether it was in the 

September 30th call-around or sometime shortly thereafter, but the 

response was they had no positions in European sovereign debt. 

Chairman NEUGEBAUER. And it subsequently turned out they did 

have exposure. 

Mr. KETCHUM. To be most generous to them, it could be that 

they interpreted the fact that it was a repo-to-maturity and not required to be reported as an asset for accounting purposes that they 

didn’t view it as a position. But that certainly wouldn’t have been 

what we expected. They had credit and market risk, and they 

should have responded and explained it to us. 

Chairman NEUGEBAUER. Did you ever have any—once you discovered later on, and I think you discovered in March or— 

Mr. KETCHUM. We discovered it at the end of May. 

Chairman NEUGEBAUER. End of May. Did you bring that to their 

attention that you were concerned that they had not previously disclosed that? 

Mr. KETCHUM. I believe my staff did raise it with them. I don’t 

know the details. I would be glad to get back to you on it. But we 

are concerned with it. They should have been far more forthright 

than they were. 

Chairman NEUGEBAUER. And so is there—one of the things we 

want to do is when we get through with all of this, we want to do 

something productive with it. We want to make sure that we make 

the system better, but at the same time, we don’t make the system 

more onerous. So we want to be careful here. But I think it appears 

to me down the road that disclosure of these kinds of transactions, 

that would need to be a little bit clearer, and some guidelines of 

reporting those, because obviously what Mr. Corzine thought was 

a risk-free transaction turned out to be an extremely risky transaction. 

Mr. KETCHUM. I absolutely agree with you, Mr. Chairman. I 

think it should be looked at both, frankly, from a GAAP accounting 

standpoint, and indeed that is one of the reasons why we have a 

rule before the SEC that would give us the authority to require 

much more extended disclosure than exists in our present 

FOCUS—or the SEC’s present FOCUS forms. 

Chairman NEUGEBAUER. I thank the gentleman. 

The gentleman from Colorado. 

Mr. PERLMUTTER. I appreciate everybody’s testimony today. This 

is going to be something we are all going to be looking at for a 

while, to know exactly when you force a sale or merger, demand 

more capital, close the institution, because you want to allow companies to operate if they can. But here, we have other people’s 

81 

money, and that is why we have this ability for the SIPC to just 

come in and shut the doors and preserve what exists. 

So I just have a question for the SEC and for those of you who 

look at this, because when we went through this type of thing before, there was a lot of short selling going on, there was a lot of 

rumor mongering going on, there was a lot of driving a company 

that is sort of wounded into the ground. And so I would—as part 

of all your investigation, I would really like to know that was going 

on, and who benefited by it, if it is possible to check something like 

that out, because we have seen it in the past, and it really hurts 

the system. And I would just ask you to do that. 

And I have a million questions, so I am not going to ask any 

more, and I am just going to wish you all happy holidays. 

Chairman NEUGEBAUER. I thank the gentleman. 

The gentleman from Florida, Mr. Posey, is recognized for 2 minutes. 

Mr. POSEY. Thank you very much, Mr. Chairman. 

Mr. Duffy, I believe in a Senate hearing you were asked to basically butt out of any investigation. Could you elaborate on that a 

little bit? 

Mr. DUFFY. Only to what I know, sir. 

We were told that the CFTC had asked us not to get involved 

in an investigation; that they were going to proceed with the investigation, so we were no longer a part of the investigation. So you 

would have to ask them why. I don’t know. 

Mr. POSEY. Do any of you have any interest in pursuing an investigation of your own? Other than just being observers about 

what you read in the newspaper or what somebody tells you, did 

anyone else beside Mr. Duffy attempt to pursue your own investigation? Just anybody raise your hand if you did. 

Good. I would like to hear about it. I would like to hear from all 

of you. 

Mr. Chairman, if I can have time. 

Mr. Kobak? 

Mr. KOBAK. Part of our statutory duties, as I said in my remarks, 

is to do a thorough and independent investigation. We are doing 

that. We are trying to coordinate it with the other investigations 

that are going on. 

Mr. POSEY. But you weren’t asked to butt out? 

Mr. KOBAK. No. 

Mr. POSEY. Okay. Mr. Ketchum? 

Mr. KETCHUM. We weren’t asked to butt out. We provided support to the trustee, and we understood that the SEC and the CFTC 

were both investigating this. It was not a matter of butting out, but 

of allowing the agency to do their work. 

Mr. COOK. Yes, sir. We are looking at many things related to 

this. 

Mr. POSEY. You haven’t been asked to butt out? 

Mr. COOK. No, sir. 

Mr. POSEY. Mr. Berkovitz? 

Mr. BERKOVITZ. We are investigating what happened to the 

funds. 

Mr. POSEY. Everybody is investigating, and Mr. Duffy is the only 

guy who was asked to butt out. Does anybody have any idea why 

82 

that could be? Nobody has any idea why Mr. Duffy’s organization 

is the only one that was asked not to do so? 

Mr. DUFFY. Just so it is clear, sir, all the information I have testified on is information we have gathered in our own internal interviews prior to us being asked not to investigate further. So that is 

what I have testified. 

Mr. POSEY. Did they tell you why? I find that incredulous. 

Mr. DUFFY. I guess you would have to ask the CFTC why. I don’t 

know. 

Mr. POSEY. Why? 

Mr. BERKOVITZ. I am not familiar with what has been referred 

to, but even if I were, I couldn’t talk about it. 

Mr. POSEY. With the Chair’s permission, and I am sure everyone 

left on this panel would be intensely interested in knowing that at 

the earliest possible moment you are able to tell us, why you would 

ask Mr. Duffy not to participate in an internal investigation. And 

I hope you will write that down and not forget it. At the earliest 

possible time that you feel ethically, morally, or legally able to tell 

us why you would tell him not to conduct an internal investigation, 

not to discover any facts on his own that he possibly could, we 

greatly would look forward to having your explanation on that. 

Chairman NEUGEBAUER. I thank the gentleman for his questioning. 

The gentleman from Texas, Mr. Canseco. 

Mr. CANSECO. Thank you, Mr. Chairman. 

I just have a very brief question, because most of the questions 

have already been asked. 

So, Mr. Duffy, MF Global had a very spotty compliance record and paid about $87 million in fines to regulators in 2007. Was 

there anything in MF Global’s past that would give CME concern 

about the segregation of customer funds at the company? 

Mr. DUFFY. No. Again, we do random audits. We audit each and 

every one of our firms every year, as we are required to do. We do 

spot audits. We get daily segregation reports. We do third-party 

tie-outs. They have had some disciplinary actions, I think they 

were fairly de minimis, throughout the years. But when they took 

over after Refco failed, we never took them off daily reporting. Most 

firms don’t have to report daily. It comes a day or so later. And we 

have continued to keep a close watch on all of our firms, including 

MF Global. 

Mr. CANSECO. Thank you very much. I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

And I apologize to the gentleman, Mr. Miller, for skipping over 

him. So you are recognized. 

Mr. MILLER OF NORTH CAROLINA. That is fine, Mr. Chairman. I 

will just accept double the time. 

The only proposal that I can recall in Dodd-Frank that got at the 

repo market, which was a huge part of the financial crisis, was a 

proposal from the FDIC and Sheila Bair to limit how much could 

be paid, or to give the FDIC discretion in receivership to pay less 

than 100 percent of secured transactions, which was obviously 

aimed at the repo market. But all the debate in Congress was 

about mortgages on office buildings, which made me think that 

Congress does not really understand the shadow banking system 

83 

and the repo market. And someone really needs to, because this is 

very important. 

And it is also very much the case that the industry does not 

want us to understand it, because if we did understand it, we 

might start to pay attention and figure out how much of a risk it 

really posed to us. 

I have a couple of questions about proposals that have been 

made to limit repo transactions. One is, and I mentioned it earlier, 

to limit the number of times a given collateral—Mr. Capuano used 

the term ‘‘rehypothecation,’’ and then he admitted he wasn’t exactly 

sure what that meant, but it is the same collateral being used as— 

the same instrument, the same asset being used for collateral for 

multiple transactions. Should that be used ad infinitum like double 

mirrors, where you just see forever, or should there be some limit 

on the number of times a given asset can be hypothecated? 

Mr. Duffy? 

Mr. DUFFY. As I said earlier, sir, I do believe that there needs 

to be a limit on how much any particular security can be leveraged 

out. So, if it is 20 times over, and we are all looking to get the 

same security back at the same time, and there are 20 of us looking for one thing, 19 of us are going to have a problem. So I do 

believe that there needs to be some kind of limit to that type of behavior. 

Mr. MILLER OF NORTH CAROLINA. Anyone else? Okay. 

Mr. COOK. Sir, I would just add I think there are a lot of complicated issues there. Repos are a very valuable financing tool in 

the markets. And I think, frankly, repos-to-maturity may have 

their purpose. I am not here to defend them, but they do cut down 

certain risks. They potentially create others. 

I think you are raising an important question. I know the ranking member has asked us to look at this article. I have looked at 

it, and I look forward to discussing it further. But I think it is hard 

to say—there is a difference between leverage and allowing 

rehypothecation. 

Mr. MILLER OF NORTH CAROLINA. Then let us go to leverage. It 

is pretty stunning that MF Global was able to have 100 percent financing of their purchase of sovereign debt, more than $7 billion 

in sovereign debt, through the repo market. Should there be essentially a margin requirement? Should there be some requirement of 

a haircut to limit the vulnerability to the repo system? 

And I understand the immediate need right now for liquidity, 

and imposing anything immediately would have a problem in the 

world economy given where things are. But if we ever pull out of 

where we are, should there be a limit on—should there be a required haircut or essentially a margin requirement? Mr. Cook? 

Mr. COOK. I believe that was, in fact, the effect of requiring them 

to take a capital charge—through the discussions with FINRA and 

the SEC, take the capital charge for these positions. I think the 

question, the broader question of leverage is a very important one. 

I think there are a number of policy issues we need to think 

through there. There are different types of leverage. And so, you 

can have two firms that have the same degree of leverage, but very 

different risks. And I think the question of how we approach that 

84 

is an important one to think about further. I don’t want to use up 

your time answering that question. 

Mr. MILLER OF NORTH CAROLINA. Anyone else? I am now past 

my time. 

Mr. KETCHUM. I would just underline what Mr. Cook said. I 

think you raise a very important issue from the standpoint of viewing leverage, particularly with respect to assumptions in most of 

the financial oversight, from banking to securities firms, with regard to matched book leverage that is built in. But the exposure 

to that leverage varies dramatically by asset quality and dramatically by the nature and the maturities of that matched book. 

So I think you raise an important issue that all of us should go 

back and review, but I think Mr. Cook is right, there is also a great 

deal of an exceptionally critical part of financing that is built into 

the repo market. 

Mr. MILLER OF NORTH CAROLINA. One last question, at the chairman’s indulgence. Sheila Bair’s argument for her haircut on the 

repo market is that there needs to be some market discipline. 

There was none; that lenders in the repo market were making their 

decisions based entirely upon the collateral. When Bear Stearns 

was obviously listing in the water, Lehman was listing in the 

water, everyone knew they were in deep trouble, and the result of 

the favored position of repo transactions was that when the FDIC 

finally arrived, there was just this smoking crater in the ground instead of an institution that actually may have had some franchise 

value and had some assets. 

Do you think there is any discipline in the repo market? And 

what can be done to create some discipline in the repo market? 

Mr. COOK. I will take a stab, sir. It is, again, a complicated question. 

I think in some respects, Lehman and Bear are examples where 

counterparties looked beyond the collateral, because those entities, 

as I understand it, were not able to finance themselves even using 

Treasuries. So there is a discipline in that sense. But that is also 

part of the challenge is if you become highly dependent on financing yourself, including using very high-quality collateral, and there 

is some reputational issue that is out there, then you have a significant liquidity problem. 

I think one way to come at your question—I am sure there are 

many—is to think about the appropriate capital treatment of these 

transactions, whether they are being properly addressed through 

capital charges. 

Chairman NEUGEBAUER. I thank the gentleman. Good questions. 

The Chair notes that some Members may have additional questions for the panel which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses and to 

place their responses in the record. 

We thank this panel. I would remind members of the committee 

that we believe that additional hearings on this issue are warranted, and we are going to look at credit rating agencies, and 

some of the accounting practices that have been discussed today, 

risk management, internal controls. Some of those issues we think 

are important. And I think the ultimate product that we want to 

85 

deliver when we get all of the information back that we requested, 

and get reports back from the various people who are looking at 

that, is for this committee to publish a finding and let that finding 

then be a part of the record. And we can then ascertain if there 

are additional things we can do, in working with the industry, to 

make sure that we make whatever fine-tuning adjustments that 

need to be made to make sure that we do not have to have another 

hearing like this in the future. 

We thank the panel. You have been very patient. I know it has 

been a long day. And so, go ahead and take the rest of the day off. 

With that, this committee is adjourned. 

[Whereupon, at 6:25 p.m., the hearing was adjourned.] 

(87) 

A P P E N D I X 

December 15, 2011 

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