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Will MF Global Customer Interests Be Crushed by Big Banks?

Matt Koppenheffer
February 8, 2012

I'm not a lawyer. I don't even play one on TV. As a result, one of the most difficult aspects of breaking down the MF Global (OTC: MFGLQ) case has been trying to understand how the legal system works in this kind of situation.

At this point, my nagging suspicion is that it simply doesn't work. Or at the very least, a quagmire of overlapping rules and regulations has created a labyrinth that not even some of the sharpest legal minds (or at least some of the most well-paid legal minds) seem to be able to navigate.

Not that the legal issues are the only maze that those working on MF Global have had to navigate.

This just in
In an update released Monday, James Giddens, the trustee for the MF Global brokerage subsidiary, said that at this point the small army that's been picking apart the broker's books has a decent picture of where money was moved in the final days of MF Global's solvency. In short, it's not a pretty picture.

The numbers that Giddens included in his press release back up his familiar refrain that tracking down the $1.2 billion of missing customer money would be difficult because of the frenetic final days at MF Global. Here are a few of the pertinent numbers from the release:

  • Cash transactions at the broker totaled more than $105 billion in the final week.
  • There was an additional $100 billion in securities transactions.
  • In all of October 2011, the trustee examined 840 individual transactions that exceeded $10 million, for a total transaction value of $327 billion.
  • The large cash transactions include 47 bank accounts across eight financial institutions.
  • In the final five days of solvency, MF Global was hit with margin calls totaling $554 million.

To put the magnitude of these numbers in perspective, MF Global's -- the holding company -- final earnings release reported total assets of $41 billion as of Sept. 30, 2011. Shareholder equity at that date was put at $1.2 billion. That means that in the course of one week, the broker's cash transactions alone were a multiple of the company's total assets, while margin calls were nearly half of the company's total previously reported book value.

In other words, that was indeed an incredibly hectic week.

The same old story
Of course while the new numbers may be fascinating, they still leave the same nagging question: Will customers that had segregated accounts at MF Global be made whole?

The answer is still unclear, and if it is going to happen, the road to 100% appears to be a long one. While it certainly helps that the trustee now has a good idea of where all of MF Global's money went, reclaiming it is hardly an easy matter. Since these transactions involved MF Global sending money to parties that it rightfully owed money to, Giddens said he's forced to "investigate the complex factual and legal questions" that might allow him to pursue claims against some of the recipients.

But to the non-lawyer in me, this all seems hopelessly and needlessly convoluted. The bottom line is that if MF Global pulled money from customer accounts -- without replacing the funds with certain allowed assets -- to meet other obligations, then it did so illegally. In that case, the customers should be made whole from the general assets of the broker or even the holding company if necessary.

And it appears that the latter scenario is exactly what happened. Giddens wrote:

The investigation to date has found that transactions regularly moved between accounts and that funds believed to be in excess of segregation requirements were used to fund other daily activities of MF Global. In the past, such transfers were in amounts of less than $50 million, but as liquidity demands increased and could not be met from internal sources, much larger amounts were used. ... [T]he 4(d) U.S. segregated commodity customer account appears to have reached a deficit condition on Wednesday, October 26 that continued through to MF Global's bankruptcy.

Unfortunately for the customers that are still out roughly a third of their MF Global accounts, recovering the property pits them against some of the most powerful financial bodi