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Regulators Pushed for Changes, Corzine Resisted

Months before MF Global teetered on the brink, federal regulators were seeking to rein in the types of risky trades that contributed to the firm’s collapse. But they faced opposition from an influential opponent: Jon S. Corzine, the head of the then little-known brokerage firm.

Jon Corzine
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Jon Corzine

As a former United States senator and a former governor of New Jersey, as well as the leader of Goldman Sachs in the 1990s, Mr. Corzine carried significant weight in the worlds of Washington and Wall Street. While other financial firms employed teams of lobbyists to fight the new regulation, MF Global’s chief executive in meetings over the last year personally pressed regulators to halt their plans.

The agency proposing the rule, the Commodity Futures Trading Commission, relented. Wall Street, which has been working to curb many financial regulations, won another battle.

Yet with MF Global in bankruptcy and regulators scrambling to find $630 million in missing customer funds, Mr. Corzine’s effort may come back to haunt him.

The proposed rule would have restricted a complicated transaction that allowed MF Global in essence to borrow money from its own customers. Brokerage firms are allowed to use customers’ money to earn interest, not unlike banks, but this rule would have outlawed using customer funds for a loan to the firm itself.

While such financing is not unknown on Wall Street, it carries substantial risk. An outside lender would require a firm like MF Global to produce strict accounting for a loan. Without that oversight, regulators worried that firms could use such internal customer money inappropriately, including bolstering the business in hard times. The proposed rule would have affected several dozen other financial firms.

Regulators are now examining whether these transactions explain the missing money at MF Global, according to people briefed on the investigation.

The C.F.T.C. has issued subpoenas to MF Global’s auditor, PricewaterhouseCoopers, and the Securities and Exchange Commission is also conducting an inquiry. The Federal Bureau of Investigation is also looking into the missing money, although there is no indication that criminal laws were broken.

Still, Mr. Corzine has hired a prominent criminal defense lawyer, Andrew J. Levander, a partner at Dechert, according to people briefed on the matter.

Mr. Levander represented a number of Wall Street executives after the financial crisis of 2008, including the independent directors of Lehman Brothers and John A. Thain, the former chief executive of Merrill Lynch.

Neither Mr. Corzine nor MF Global has been accused of wrongdoing. MF Global declined to comment and Mr. Corzine did not respond to a request for comment.

Just three months ago, Mr. Corzine’s firm assured regulators that the proposed rule could cripple the futures brokerage industry by hurting their profitability. In a letter, MF Global told regulators that they were trying to “fix something that is not broken,” adding that the firm was not aware of any brokerage firm like itself that was unable to “provide to their customers upon request any segregated funds.”

MF Global’s clients, including hedge funds, individual investors and agricultural firms, now know a different reality, as the clients struggle to locate their missing funds. And regulators are pushing to again move forward on the rule. But for MF Global, the rule will come too late.

The trades at the center of MF Global’s downfall — big bets on the debt of five European countries — may yet prove profitable. But they raise questions about why the firm escalated its risk-taking under Mr. Corzine, leading to a crisis of confidence among rating agencies, creditors and regulators.

As a former sovereign debt trader at Goldman Sachs, Mr. Corzine wagered that the European regulators would backstop any default. So even as dark clouds circled over Europe, he sensed an opportunity. Starting in late 2010, MF Global began to accumulate short-term sovereign debt of countries like Italy, Spain and Portugal.

MF Global financed these purchases through complex transactions known as repurchase agreements. In these, the bonds themselves were used as collateral for a loan to purchase them. The interest paid on that loan was less than the interest the bonds paid out, earning the firm a profit from the spread.

While that practice is quite common, the C.F.T.C. wanted to crack down on such lending in those instances when customer funds were used. The C.F.T.C. proposal would have also banned the use of client funds to buy foreign sovereign debt.

It is unclear whether the firm used client funds to purchase the risky bonds of Italy, Spain, and other debt-laden European nations, but experts say it is not unusual for such transactions to be paid for with customer money.

A person close to MF Global said the firm did not use client funds to finance these trades.

Leading the government’s effort to curtail these arcane practices was Gary Gensler, the chairman of C.F.T.C., who had worked for Mr. Corzine at Goldman Sachs. Mr. Gensler pushed for the proposed change in October 2010, and planned to bring it to a vote this summer.

MF Global has four outside lobbyists in Washington, tiny by Wall Street standards. But it was Mr. Corzine who marshaled the firm’s response to the proposal, lobbying most of the agency’s five commissioners directly. One commissioner said he visited with Mr. Corzine in MF Global’s headquarters, and acknowledged being impressed by the Wall Street titan, said a person with direct knowledge of the meeting who asked for anonymity because the meeting was private.

The C.F.T.C. polices the markets for futures trades. Staff members there often do not have a Wall Street pedigree.

Mr. Corzine’s background in finance made him highly credible, agency officials said.

Mr. Corzine’s efforts culminated on July 20, as the agency was preparing for a vote on the proposal. That day, MF Global executives were on four different calls with the agency’s staff. Mr. Corzine himself was on two of those calls.

One of the calls was with Mr. Gensler. Both men are active Democrats, and served on financial panels together recently.

Shortly after the calls, Mr. Gensler, aware that he could not push the vote through, decided to delay the proposal indefinitely.

But after MF Global’s blowup and the ensuing fallout from the missing funds, regulators said they were considering pushing again on the rule.

“I think it’s time to move ahead — expeditiously — and make that rule tighter, cleaner, and ultimately safer, for customers,” Bart Chilton, a Democratic member of the C.F.T.C., said in a statement.

Mr. Chilton also wants the agency to require firms to produce detailed documentation “to ensure that the funds are really there.”

Internal repurchase agreements emerged on Wall Street in 2005. At the time, the transactions were off limits to banks and brokerage firms. But at the urging of Lehman Brothers, the C.F.T.C. blessed the new approach to getting financing.

In September 2008, Lehman collapsed amid a global financial crisis. It later was disclosed that Lehman’s use of another little-known repurchase agreement allowed it to temporarily obscure billions of dollars in losses.

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