Research Briefing

The MF Global Scandal Shows That Obama Failed To Live Up To His Own Rhetoric

CORZINE USED HIS CONNECTIONS IN THE OBAMA ADMINISTRATION TO DELAY RULES THAT WOULD HAVE STOPPED HIM FROM RAIDING CLIENT ACCOUNTS

THEN: Obama In 2008: “Companies Like Enron And WorldCom Took Advantage Of The New Regulatory Environment To Push The Envelope.”  “Companies like Enron and WorldCom took advantage of the new regulatory environment to push the envelope, pump up earnings, disguise losses and otherwise engage in accounting fraud to make their profits look better, a practice that led investors to question the balance sheets of all companies and severely damaged public trust in capital markets. This was not the invisible hand at work. Instead, it was the hand of industry lobbyists tilting the playing field in Washington as well as an accounting industry that had developed powerful conflicts of interest and a financial sector that had fueled over-investment.” (Senator Obama, Remarks On The Economy, New York, New York, 3/27/08)

NOW: “MF Global Also Shows How This New Era Of Regulatory Power Puts A Premium On Political Connections.” (Editorial, “Mr. Corzine And His Regulators,” The Wall Street Journal, 12/1/11)

The Dodd-Frank Bill Has “Failed The Law’s First Serious Test” With MF Global. “MF Global customers are still waiting to be made whole, but the larger importance of this story relates to the effectiveness of the Dodd-Frank, Sarbanes-Oxley regulatory model. Americans have been told that, in response to the 2008 financial crisis that regulators failed to predict or prevent, regulators needed to have vast new powers to prevent the next crisis. But in MF Global the regulators failed the law's first serious test.” (Editorial, “Mr. Corzine And His Regulators,” The Wall Street Journal, 12/1/11)

Last Week, The CFTC Approved The “MF Global Rule” Which Would Bar Wall Street “From Using Client Funds To Buy Foreign Sovereign Debt.” “Federal regulators approved tougher constraints on Wall Street risk-taking on Monday, adopting the ‘MF Global rule,’ named after the collapsed brokerage firm that is believed to have improperly used hundreds of millions of dollars of customer money. The new rule will limit how the brokerage industry can invest customer money, largely barring firms from using client funds to buy foreign sovereign debt. It also prevents a complex transaction that allowed MF Global, in essence, to borrow money from its own customers.” (Ben Protess, “Regulator Approves ‘MF Global Rule,’” The New York Times’ “Dealbook,” 12/5/11)

• “MF Global Violated That Principle In Its Final Chaotic Days, Tapping Its Segregated Client Accounts To Meet Its Own Financial Obligations, People Briefed On The Matter Have Said.” (Ben Protess, “Regulator Approves ‘MF Global Rule,’” The New York Times’ “Dealbook,” 12/5/11)

The CFTC Proposed The Rule In October 2010, But “Met A Powerful Roadblock In Mr. Corzine.” “Mr. Gensler’s agency initially proposed the crackdown in October 2010, and neared a vote on the plan this summer. But at the time, the agency met a powerful roadblock in Mr. Corzine, former Democratic governor of New Jersey.” (Ben Protess, “Regulator Approves ‘MF Global Rule,’” The New York Times’ “Dealbook,” 12/5/11)

Corzine Launched An “Aggressive Lobbying Campaign” And Delayed The Rule From Taking Effect. “Mr. Corzine’s efforts culminated on July 20, as MF Global executives were on four different calls with the agency’s staff. Mr. Corzine personally participated in two of those calls. Ultimately, the aggressive lobbying campaign helped delay the proposal.” (Ben Protess, “Regulator Approves ‘MF Global Rule,’” The New York Times’ “Dealbook,” 12/5/11)

The CFTC’s Chairman Is Gary Gensler, Who Worked For Corzine When They Worked At Goldman Sachs. “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.” (Azam Ahmed And Ben Protess, “As Regulators Pressed Changes, Corzine Pushed Back, And Won,” The New York Times’ “Dealbook,” 11/3/11)

• “Both Men Are Active Democrats, And Served On Financial Panels Together Recently.” (Azam Ahmed And Ben Protess, “As Regulators Pressed Changes, Corzine Pushed Back, And Won,” The New York Times’ “Dealbook,” 11/3/11)

• “When Corzine Ran For New Jersey Governor, Gary Gensler Gave $10,000 To The State Democratic Party, Which Was Trying To Get Corzine Elected.” (Daniel Wagner, “MF Global’s Regulator Has Ties To Company’s Leader,” The Associated Press, 11/3/11)

MF GLOBAL’S COLLAPSE UNDER CORZINE’S TENURE HAS “SHAKEN FAITH IN THE MARKETS”

THEN: Obama: “We All Suffer” When Companies Engage “In Accounting Fraud To Make Their Profits Look Better,” Which Lead “Investors To Question The Balance Sheets Of All Companies.” “We all suffer when we do not ensure that markets are transparent, open and honest. We saw this during the dot-com boom in the '90s, when conflicts of interest between securities analysts, whose research was supposed to guide investors, and the banks they worked for led investors to doubt the markets in general. We saw it during the Enron and WorldCom scandals, when major public companies artificially pumped up their earnings, disguised their losses, and otherwise engaged in accounting fraud to make their profits look better, a practice that ultimately led investors to question the balance sheets of all companies.” (Senator Obama, Remarks On The Economy, New York, New York, 9/17/07)

NOW: “MF Global Collapse Proves Enron-Style Accounting Lives On.” (Nanette Byrnes, “MF Global Collapse Proves Enron-Style Accounting Lives On,” Reuters, 12/1/11)

“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.” (Nanette Byrnes, “MF Global Collapse Proves Enron-Style Accounting Lives On,” Reuters, 12/1/11)

• The Off-Balance-Sheet Accounting Allowed MF Global To Make Risky Bets On European Debt. “In MF Global's case, the off-balance-sheet accounting itself didn't cause the firm's downfall, but it allowed MF Global to use borrowed money to make billions of dollars in ultimately catastrophic bets on European sovereign debt - and obscured the risk those bets posed to the company.” (Nanette Byrnes, “MF Global Collapse Proves Enron-Style Accounting Lives On,” Reuters, 12/1/11)

MF Global Bought European Sovereign Debt Financed Through “Repurchase Agreements.” “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.” (Azam Ahmed And Ben Protess, “As Regulators Pressed Changes, Corzine Pushed Back, And Won,” The New York Times’ “Dealbook,” 11/3/11)

• Lehman Brothers Used “Another Little-Known Repurchase Agreement” To “Obscure Billions Of Dollars In Losses.” “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.” (Azam Ahmed And Ben Protess, “As Regulators Pressed Changes, Corzine Pushed Back, And Won,” The New York Times’ “Dealbook,” 11/3/11)

MF Global’s Bankruptcy, The Eighth Largest Bankruptcy In US History, “Has Shaken Faith In The Markets.” “The case -- the eighth-largest bankruptcy in U.S. history -- has shaken faith in the markets and put business on hold for many owners of the roughly 38,000 securities and commodities trading accounts at the firm, from big-city traders to heartland farmers.” (James O’Toole, “The MF Global  Money Chase,” CNN Money, 12/6/11)

SINCE CORZINE WAS OBAMA’S WALL STREET GUY, THE ADMINISTRATION HAD AMPLE INCENTIVE TO TURN A BLIND EYE TO HIS MALFEASANCE

THEN: Biden In 2002:  “If There Was Any, Any Involvement Because Of The Incredible Help The Bush Campaign Got From Enron … It Will Be Devastating.” MR. RUSSERT: “What's your sense of Enron as a political scandal?” SEN. BIDEN: “My sense is this could be very big, Tim. Number one, this is of a gigantic consequence. This is not like if this happened 20 years ago. So many average Americans own stock. If it turns out to be true that the Enron execs got out and they let the bag be held by their employees and the average stockholder then there's going to be heck to pay, number one. Number two, if there was any, any involvement because of the incredible help the Bush campaign got from Enron here, it will be--I don't know that there has been--but it will be devastating. And thirdly, this calls into question, Tim, what was supposed to be one of the safeguards built into the system and that is you have accounting firms who have a fiduciary responsibility to the stockholders not just to the executives.” (NBC’s “Meet The Press,” 1/13/02)

NOW: President Obama: Corzine Is “Our Wall Street Guy.” “The rollout also provided a showcase for Corzine, the former Goldman Sachs CEO whom Obama referred to as ‘our Wall Street guy’ at a meeting of Democratic governors in Chicago on Friday.” (Claire Heininger, “Corzine Profile Rises In Obama Camp,” The Star-Ledger (NJ),6/23/08)

Corzine Played A “Central Role” In Obama’s Wall Street Fundraising Efforts. “His new legal troubles, sparked by the bankruptcy filing of his investment firm, MF Global, could complicate the president’s efforts to raise money from the financial community given Corzine’s central role in those efforts.” (Michael Isikoff, “Corzine, Top Obama Fundraiser, Under FBI Investigation,” MSNBC, 11/2/11)

Jon Corzine Has Bundled Over $500,000 For Obama’s Reelection Campaign. (Center For Responsive Politics, Opensecrets.Org, Accessed 10/31/11)

“Corzine Has Already Held A High-End Fundraiser And Organized A Secret Meet-And-Greet Between Finance Executives And Obama’s New Chief Of Staff.” (Peter Stone, Elizabeth Lucas, John Aloysius Farrell, Paul Abowd and Rachael Marcus, “Obama Campaign Reports More Than 350 Big Bundlers, Including Solyndra Figures,” Iwatch News, 10/14/11)

Corzine Co-Hosted A Wall Street Fundraiser For Obama In April. “President Obama's first New York event since he declared his reelection will be at the home of former New Jersey Gov. Jon Corzine, the former Goldman Sachs financier who will host a high-dollar, small dinner, an invitation to the event shows. Tickets to the event, which sources said Corzine is co-hosting with another financier, longtime Obama backer Orin Kramer and his wife, cost $35,800 per person.” (Maggie Haberman, “Obama Fundraiser At Corzine Home,” Politico, 4/5/11)

• The Fundraiser Was Part Of Obama’s Efforts “To Soothe Frayed Relations” With Wall Street. “The choice of Corzine's home is notable, given his ties to the financial sector. The White House has made efforts in recent months to soothe frayed relations with the business community, after an election cycle during which some donors, unhappy with the push for Wall Street reform, claimed to be sitting on their hands.” (Maggie Haberman, “Obama Fundraiser At Corzine Home,” Politico, 4/5/11)