The US justice system is an unlovely affair of frantic litigation by too many lawyers in too many courts, with expensive and patchy results. But occasionally a judge wields his power for the public good.
Banks have not recognised their debt to the Fed
For close observers of the size of the backing that governments and central banks gave to banks and investment banks during the 2007-08 financial crisis, Bloomberg Magazine has a fascinating breakdown of the figures.
As I noted in my column last week on Hank Greenberg, the former head of American International Group, the liquidity support offered to financial institutions by the Federal Reserve – including use of the discount window – is enormously valuable.
There are various words, many unprintable, that could be used to describe Hank Greenberg’s $25bn suit launched this week against the US government and the New York Federal Reserve over the rescue of American International Group in 2008. I’ll settle for ludicrous.
MF Global’s collapse looks like a scandal
The more details emerge of the shortfall in customer funds at MF Global, the financial broker formerly headed by Jon Corzine, when it collapsed three weeks ago, the more disturbing it appears.
For a time, it seemed plausible that the funds had simply been mislaid in accounts that could not be immediately accessed when MF Global went into Chapter 11 bankruptcy. But the likelihood that the money was improperly used – and lost – has increased.
Today’s news that the estimated shortfall has risen to $1.2bn from an earlier $600m makes the affair even more serious. That figure is about a quarter of the $5.45bn in customer funds which MF Global was required to segregate.
As the FT reports:
MF Global . . . appears to have acted desperately in its final days and dug into customer funds to meet margin calls in a bid to save the company for a sale, people familiar with the government investigation said.
Investigators have spent weeks reviewing accounts at the firm and other financial institutions. MF Global’s records are sloppy and incomplete, people familiar with the matter said, requiring them to rely on third parties.
If MF Global did act in this way, then it is a clear breach of the legal requirement to keep customer and proprietary funds segregated. It has astonished many people on Wall Street because this is such a basic safeguard.
Investigators are still trying to establish exactly what happened at MF Global but this could prove to be a historic financial scandal.
Michael Bloomberg, New York City’s mayor, made himself unpopular with his decision to raid Zuccotti Park in the early hours of Tuesday and evict 200 campers from the Occupy Wall Street protest, but he was right. So is the City of London Corporation in attempting to shift the tents from outside St Paul’s Cathedral.
MF Global’s endorsement by the New York Fed
Mark Williams’ piece in the FT arguing that the New York Federal Reserve should not have permitted MF Global to be a primary dealer in US government bonds raises the question of how it happened.
Mr Williams explains why MF Global, headed until last week by Jon Corzine, former chairman and chief executive of Goldman Sachs, was a dubious candidate for this official seal of approval:
“From a risk perspective, its capital position was 30 times weaker than that of most primary dealers. It was also new to investment banking, a higher risk area than its core brokerage business. Under Mr Corzine it placed ever bigger bets, and more of its own capital, at risk. With less capital, trading losses could quickly erode its financial stability . . .
“By March 2010, soon after the New York Fed’s decision, a joke began to circulate: MF Global won fast-track approval because of two words: Jon Corzine. William Dudley, New York Fed president, and Mr Corzine had indeed worked together at Goldman Sachs, though approval came a month before the latter officially joined MF Global.
Rather like a ratings agency that downgrades a company after it collapses, the Fed terminated MF Global’s primary dealer status on October 31, having allowed it to retain the privilege until disaster struck.
Under the Fed’s own guidelines, that was highly questionable:
“In general, the New York Fed must determine that an applicant’s financial condition can comfortably support the obligations of a primary dealer. In making this judgment, the New York Fed will conduct a credit review of the applicant and will consider various measures of the applicant’s financial condition.”
One broker to whom I spoke last week suggested that MF Global’s status was less a matter of Mr Corzine’s connections, than the Fed’s determination to have as many primary dealers as possible to distribute US government debt. It could not longer afford to be picky.
Either way, the MF Global affair should prompt a reassessment.
Once upon a time, there was an emperor who had been thrown out of the kingdom of New Jersey and was seeking another place to rule. Corzine, for that was his name, opened his wardrobe at home one day and spotted some clothes glimmering at the back.
On my way to visit the Occupy Wall Street protest this week, I walked along the heavily barricaded street, past the still-pockmarked masonry of the former J.P.Morgan building where Italian anarchists are thought to have detonated a bomb in 1920, killing 38 people. Then I turned right at Trinity Church and up to the camp in Zuccotti Park.
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John Gapper is an associate editor and the chief business commentator of the FT.
He has worked for the FT since 1987, covering labour relations, banking and the media. He is co-author, with Nicholas Denton, of All That Glitters, an account of the collapse of Barings in 1995.
Andrew Hill is an associate editor and the management editor of the FT. He is a former City editor, financial editor, comment and analysis editor, New York bureau chief, foreign news editor and correspondent in Brussels and Milan.
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