MF Global proves Enron-era (off-balance-sheet) accounting lives on

MF Global proves Enron-era accounting lives on
By Nanette Byrnes | Reuters – 2 hours 14 minutes ago

REUTERS - The off-balance-sheet accounting methods that Enron and Lehman Brothers made famous in their epic failures years ago have a modern-day poster child: MF Global .

Like its predecessors, the bankrupt brokerage formerly run by Jon Corzine took advantage of an accounting maneuver to keep certain financial obligations off its books, making the firm look less indebted and thus less a risk than it really was.

On Thursday, Mary Schapiro, chairman of the Securities and Exchange Commission, told a committee of Congress the SEC was investigating the accounting treatment that helped mask MF Global's exposure to risky foreign sovereign debt.

The fact that MF Global was able to use the technique highlights how off-balance-sheet moves are evolving as quickly as new accounting rules intended to stop them. Earlier this year, the Financial Accounting Standards Board changed its rules to bar an off-balance-sheet loophole that had helped Lehman Brothers get into trouble in 2008.

Corzine orchestrated a smash-and-grab raid in broad daylight on the wealth of thousands of private individuals. Yet the SEC---the outfit that let Madoff run wild----is looking at "debt-masking techniques" as if that was the big crime here.

You got that right.

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......neither Corzine nor any of the other MFGlobal execs (Corzine’s G/S cronies) have been arrested, detained or even questioned under oath.......notwithstanding a billion dollars missing.

One gets the impression of criminality permeating the entire financial and regulatory system.

Wall street/political veteran Corzine is accustomed to using other people’s money to benefit himself. He has no qualms about missing money. Billions went missing when he was tossed out of NJ state govt (details below).

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Everybody knows.......not one thin dime passes between accounts-—on Wall Street and elsewhere-—that isn’t thoroughly and incessantly tracked wherever it goes. Not one thin dime. The whole world knows it.....and they are all watching.

SO WHERE IS THE MISSING MF GLOBAL MONIES? Time to connect the dots

<><> Corzine is a well-rounded operator. As Governor, he left the state of NJ $8 billion in debt. $8 billion went missing from one state agency....other agencies like UI and the Transporation Trust Fund went bankrupt with no explanation why. The $82 Billion state pension fund lost about 25%.

<><> Right before Corzio’s reelection, Obama sent $17.5 Billion stimulus to NJ-—which promptly vanished.

<><> Gov Corzine made several highly suspicious trips to Israel when he had no political reason to be there. Israel is the only place in the world where you can take a suitcase full of money to a bank-—and noboody asks where it came from. Isreal also has many businsses in NJ funded with NJ state “grants” as well as an Israeli Chamber of Commerce.

<><> MF Global principal Brad Abelow was Corzine’s appointee as NJ Treasury Secy——controlling ALL NJ assets. Gov and Secy started an investment business——but the two “financial geniuses” said did not know this was illegal.

<><> MF Global principal Chris Flowers handled Sen/Gov Corzine’s “blind assets” ......Flowers led the taskeover of a Japanerse bank for Corzine——Sen Corzine passed a bill giving the bank a US tax break......said he did not know the bill benefitted him.

<><> Corzine registered three corporations in super-secret financial haven——Delaware——BEFORE taking office.

<><> All three of the above-named MF Global principals were G/S cronies.

<><> Ponzi king Bernie Madoff made a generous contribution to Corzine’s campaign.

Yet the SEC are looking at debt-masking techniques as if that was the big crime here.

If it were a crime, it would be a very serious development for Corzine, because this is something that would be impossible to do without CEO and CFO knowledge - they would be directly responsible for hiding debt.

However, the "repo-to-maturity" is for now within the acceptable methods of off-balance accounting, just like "Repo 105" which were used by Lehman and Bear Stearns, and few other banks at the end of the quarter, to show less debt / liabilities on the balance sheet during reporting period. "Repo 105" wasn't illegal and wasn't the reason for Lehman's and Bear's downfall, but it is nonetheless being disallowed and phased out by FASB at the end of this year.

Because of netting of liabilities and assets, the net asset value of holdings is not changed, so it's not generally a problem. However, the real issue is that it makes liquidity ratio at reporting time look much better than it really is, which enabled MFGH to borrow more from the firms who look at liquidity ratio as a primary measure of collateral risk. That's what helped Corzine lever up at 33:1 by the time of bankruptcy, while MFGH liquidity was going downhill.

When regulators made a request for higher capital requirement, it was a margin call which MFGH couldn't meet, without dipping into customer accounts.

There are good reasons for some types of [collateralized] repos or unused / potential debt (such as Lines Of Credit / LOCs or credit cards limits) to be off-balance sheet, so it shouldn't be treated as one-size-fits-all problem. There is no question that Corzine and his CFO used it to raise the leverage as high as they could, which is why they finally got a call to increase capital.

Unless there is more that SEC can find (like overstating the capital on the asset side or reporting collateral as a clear and free asset instead of restricted asset, or misleading the lenders about MFGH financial situation / leverage levels), it's doubtful that having the debt in the "repo-to-maturity" contracts off the balance sheet is actionable.

Corzine orchestrated a smash-and-grab raid in broad daylight on the wealth of thousands of private individuals.

I don't know if the issue of smash-and-grab / commingling of customers' accounts is under SEC purview in this case but, at a minimum, it definitely violates CFTC and FInRA regulations, so there is a definite trouble there for Corzine, it's just on a different track.

The first order of business now is to make as many MF Global customers whole as possible. The multiple investigations are ongoing, there need not be a rush to see a "perp walk" or "throw someone in jail" yet, nobody is going anywhere. Corzine will be on the hot seat before the Congressional committee(s) and the story can be milked for all it's worth during the election season, while he is out of circulation trying his impression of an "invisible man".

This mess will go on for some time, and this was a pretty small brokerage / investment firm with approximately 41,000 "segregated" customer accounts, including about 15,000 of "cash-only" accounts.

How would you like to be in this nightmare?
MF Global Customer Highridge Says $50 Million Commodity Account ‘Missing' - BL, by Linda Sandler and Thom Weidlich, 2011 December 02

Meanwhile, the anger keeps growing, and the former MF Global employees are very unhappy with Corzine, so they are not likely to cover for him.

From MF Global Staff Bitten by Pay Plan - WSJ, by Christian Berthelsen, 2011 December 03

Early last year, MF Global floor broker Todd Thielmann received a notice in the mail that his take-home pay would be cut by 10%, with the money diverted to a fund for employees to own restricted stock in the firm.
The timing couldn't have been worse. Less than two years later, the stock is almost worthless.
Mr. Thielmann, who traded grain futures and options in Chicago, was one of 1,121 MF Global employees who were required to participate in the company's revised compensation policy, starting in February 2010.
By getting employees to receive a portion of their income in stock, the company saved nearly $58 million on cash compensation over its last two fiscal years, according to its annual financial statements. Employees also faced severe limits on selling the stock — and would lose the shares if they left to work for a competitor. ..... < snip >
..... Mr. Corzine targeted two areas in his first conference call with analysts: cutting costs and changing MF Global's business model. He said he wanted to reduce compensation costs from 63% for fiscal year 2010 to under 50% ..... < snip >
..... For the professional staff, the firm awarded a larger share of annual bonuses in stock instead of cash. The program had a three-year vesting period, and employees could sell a maximum of one-third of their shares each year.
Many brokers and traders were opposed to what they saw as a pay cut; some even left the firm because of it, according to former employees.
But others felt like they had no choice but to go along with it. "We looked at it as a cost of keeping your job," said Mr. Thielmann. ..... < snip >

OT: CME might actually deliver on its threat and move from Chicago unless they get a favorable treatment and breaks from Illinois tax code.

Indianapolis courting Chicago's CME Group - CT, 2011 December 02

Will we see #OccupyChicago in action protesting the state tax breaks to the "fat cats" on Wacker Drive, or hailing / protesting the "fat cats" moving out of state? That would be fun to watch.

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