The House Oversight and Investigations Subcommittee will be voting at 3pm this afternoon to issue a subpoena for former MF Global CEO Jon Corzine.
Representative Randy Neugebauer (R-Texas) is leading the committee's investigation on MF Global and will chair the hearing next week on the 15th where Corzine will face the committee.
The Chairman offered his outlook and expectations to my questions in an email.
LL: CFTC Commissioner Bart Chilton told CNBC he believes MF Global acted "potentially nefarious, potentially illegally," and "We're going to go after it." You are subpoenaing Corzine. What do you hope to hear from him?
Rep. Neugebauer: We are in the beginning part of our investigation into MF Global so it is a bit early to draw conclusions about Mr. Corzine’s culpability. However, he is an important piece of the MF Global puzzle and his testimony will help give us a complete picture of the events leading to MF Global’s collapse.
First and foremost we want to know where all the missing customer funds are and how and why they are missing. We’re hearing from the regulators that 10-20% of customer funds are missing and the Bankruptcy Trustee believes that even if he recovers everything that is at US depositories, the shortfall may be as much as $1.2 billion or more.
Secondly, we want to know how a 228 year old company went bankrupt under Mr. Corzine’s short tenure as CEO. The MF Global bankruptcy was a corporate failure and a regulatory failure. The bankruptcy has brought disruptions to the commodities and securities markets. The bankruptcy also injected uncertainty into the futures and options markets. A shortfall in customer funds represents a breakdown in the regulations and we need to get to bottom of this.
LL: The books are a mess, are you worried the money will never get their money back?
Rep. Neugebauer: This is a big concern. Segregation of customer funds is the cornerstone of the futures business so it is completely unacceptable to have a shortfall here - let alone a $1.2 billion shortfall. One of the main components of our investigation is to determine how something like this could have happened.
What we do know is that MF Global has a history of non-compliance with record keeping and risk management rules, which included 80 regulatory actions taken against the firm since 1997. We are also aware that the SEC and FINRA were concerned with how MF Global reported its financial condition, in particular its use of the practice of “window dressing” where it disguised its debt levels to investors by temporarily slashing the debt it was carrying before publicly reporting its finances each quarter.
We need to determine which regulators knew what when and if they communicated these concerns between and among each other. This will be a big focus of our investigation.
LL: Chilton as well as others have said a number of regulatory failures helped cause this problem. As Chairman of the Oversight & Investigations Subcommittee, what would you like to see Congress do here? How should regulations be made better?
Rep. Neugebauer: The Subcommittee started its MF Global investigation in early November. We are currently sifting through documents, working to obtain documents, and ensuring our investigation is done in a thorough – and not a hurried – fashion. So it is too early to determine what regulatory or policy fixes, if any, need to be made. At first glance, it does appear that we didn’t need additional regulations; we simply needed regulators doing their jobs.
It’s important to understand that The Commodity Exchange Act mandates the segregation of customer funds. This law has been on the books since 1936 and I am not aware of another instance where customer funds have gone missing – at least to this extent. So we are either looking at a massive accounting failure or a blatant disregard of an enforceable law that has been around for over 70 years.
LL: Do you think Jon Corzine was a Rogue Trade based on the bets he placed?
Rep. Neugebauer: This is still the beginning of the investigation and we cannot make any conclusions until we have all the facts about all parties involved in the collapse of MF Global, including the regulators who may have been able to stop this. We need information from the other MF Global executives, the firm’s auditors, CFTC, SEC and self regulatory organizations.
Now what we do know is that the European sovereign trade was orchestrated by Jon Corzine. We also know that executives within the firm including the former chief risk officer, Michael Roseman, had concerns about the trade, which were shared with Mr. Corzine.
But there are a lot of facts that we do not know. How was MF Global even able to complete such a highly leveraged trade that amounted to 20% of its balance sheet? What did the regulators know about the risk management at MF Global? All these questions need to be answered.
LL: Do you plan to call on Mr. Roseman to testify at your hearing?
Rep. Neugebauer: We have reached out Mr. Roseman’s attorney to facilitate an interview. He is an important part of the puzzle and after we speak with him we will determine if he should be called as a witness.
LL: CFTC Chairman Gary Gensler has come under intense scrutiny regarding CFTC’s regulation of MF Global. How does he factor into your investigation of the MF Global matter?
Rep. Neugebauer: Mr. Gensler will be a central part of our investigation. In fact, I wrote a detailed letter to Chairman Gensler in November asking for various documents related to the CFTC’s handling of the MF Global matter. The letter also presented detailed questions regarding the CFTC’s interaction and coordination with other regulators and SROs in the months leading up to the collapse of the firm.
I am also looking into why Chairman Gensler found it necessary to recuse himself from the MF Global investigation to avoid even an appearance of conflict of interest –given his previous relationship with Mr. Corzine-; yet he met with Mr. Corzine months earlier on matters material to MF Global’s business. This inconsistency is something the Committee plans to investigate.
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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."
