Originally published Saturday, November 5, 2011 at 10:03 PM

Behind the scenes look at MF Global's last days

While the commodities and derivatives brokerage firm fell apart with ferocious speed, the collapse came after regulators raised warning flags for more than four months.

The New York Times

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A little before 2 a.m. Monday, Jon S. Corzine was in MF Global's offices in Manhattan, scrambling to cut a deal to save his firm. Haggard from too little sleep, at times pacing the hallways, he at least had a handshake agreement with one suitor for the firm.

Then the chief executive was interrupted to handle a brief conversation that would stop the deal talks cold: Hundreds of millions of dollars in customer funds, he was told, could not be located.

Three hours later, the board of MF Global, with no bidders or options left, voted to file for bankruptcy, the largest failure on Wall Street since Lehman Brothers in 2008.

While the commodities and derivatives brokerage firm fell apart with ferocious speed, the collapse came after regulators raised warning flags for more than four months. They told MF Global it needed to raise more capital, and they asked about risky transactions involving European debt.

Yet Corzine resisted, lobbying to persuade regulators that the firm did not need to raise capital, according to people briefed on the discussions. MF Global did improve its capital position, but it was not enough to save the firm.

The details that have emerged about MF Global's final 72 hours — drawn from dozens of interviews with people who participated in the weekend discussions or were directly briefed by people who did — illustrate that three years after the financial crisis, Wall Street executives are still fighting regulators' demands.

It also shows that even when the watchdogs sound the alarm, it is not necessarily enough to save a firm. Now, multiple regulators and the FBI are examining the firm's collapse, trying to determine what went wrong and where the missing money, now suspected to be roughly $630 million, went.

The CME Group, a major exchange where MF Global traded until this week, said Wednesday that Corzine's firm had appeared to transfer client money sometime last week "in a manner that may have been designed to avoid detection," a serious violation of Wall Street regulations. MF Global did not disclose the shortfall in client money to CME or to regulators until Monday morning, shortly before the firm filed for bankruptcy.

One of the first signs of trouble for MF Global came in June, when regulators reviewed its recent financial statements, according to a person with direct knowledge of the matter. In a footnote, MF Global disclosed that it had bought debt from Italy, Ireland and other troubled European nations.

Agency alarmed

The disclosure alarmed the Financial Industry Regulatory Authority (Finra), Wall Street's self-regulator, which worried that MF Global lacked enough capital to support the trades.

Finra called MF Global, pushing it to raise its capital levels, but Corzine fought back, according to people with knowledge but not authorized to speak on the record. Frustrated, Corzine decided to go over Finra's head to the Securities and Exchange Commission (SEC), one person with direct knowledge said.

In July, Corzine traveled to Washington, D.C., to state his case to SEC officials. Corzine chalked up their concerns to jitters over Europe's ballooning debt crisis, the person said. The SEC and Finra wouldn't bend, and in August, the firm increased its capital cushion.

MF Global did not respond to requests for comment; Corzine did not respond to a request for comment.

The move offered only short-term relief. By mid-October, MF Global's European gamble was being widely discussed on a nervous Wall Street. Rumors spread that Moody's Investors Service was considering a cut to MF Global's credit rating. Finra resumed regular talks with the firm.

Late on Oct. 24, Moody's did move to cut its rating on the firm, to just one notch above junk status, citing in part the European bond holdings.

That proved to be a watershed moment: The downgrade led MF Global's trading partners to demand extra collateral, draining the firm's cash supply.

Under mounting pressure from D.C. and Wall Street, MF Global moved up its scheduled quarterly earnings announcement by two days, reporting Oct. 25 that it had recorded a $186 million loss, its fourth loss in six quarters. The share price of MF Global went into free fall, tumbling 67 percent over the course of that week. The firm also started drawing on its credit lines.

Corzine hired the investment bank Evercore Partners to help him find a buyer for part or of all of the firm. MF Global also contacted BlackRock, the giant asset manager, to help it wind down its balance sheet — including efforts to sell its holdings of European debt. Eventually, MF Global brought bankruptcy lawyers on board to prepare for the worst. Corzine had other fires to put out.

Thursday, regulators from several agencies arrived at MF Global's offices in New York and Chicago. What they saw over the course of the next few days troubled them, according to people knowledgeable about the matter who spoke only on condition of anonymity. The Commodity Futures Trading Commission, led by Gary Gensler, became concerned that MF Global had not kept customer money separate from company funds, a fundamental rule on Wall Street.

MF Global assured regulators at the time that the money was in order, these people say.

Last Saturday, Gensler reached out to H. Rodgin Cohen, a partner at Sullivan & Cromwell who has long served as Wall Street's go-to lawyer in a crisis.

"We need more documents," Gensler told the lawyer, according to people briefed on the conversation. The call set off a scramble at MF Global as employees tried to locate the documents regulators were demanding.

Other issues about the quality of the firm's bookkeeping were being spotted by employees from BlackRock, who had arrived to value the MF Global portfolio, according to a person with knowledge of the matter.

Yet even as questions about MF Global's records were beginning to surface, talks on a possible sale were getting under way.

Bidders for firm

Two main bidders quickly emerged — the Interactive Brokers Group and Jefferies & Company. Jefferies, a brokerage house based in New York, has a futures-trading business. A small team of Jefferies executives arrived at MF Global last Friday and returned the next day as well.

They sorted through stacks of information about MF Global's operations. While they didn't notice anything out of order with MF Global's books, they left that Saturday without making a bid. Jefferies, a person with knowledge of the matter said, concluded it simply needed more time to complete such a complicated acquisition — time MF Global didn't have.

That left Interactive Brokers. The Connecticut brokerage firm was also huddled in a conference room not far from where the Jefferies team was holed up. Corzine, who ran Goldman Sachs in the 1990s before serving as a Democratic senator from New Jersey and then New Jersey governor, was the lead negotiator for MF Global.

Briefing on talks

Around 2 p.m. last Sunday, Corzine and an Evercore banker, Jane Gladstone, were able to call regulators and brief them on the sale talks. They sounded optimistic.

But as Interactive Brokers continued its dive into MF Global's books, signs of exhaustion among the participants grew. J. Christopher Flowers, the MF Global investor and former Goldman executive, was spotted at the talks Sunday wearing mismatched shoes.

Just before 1:45 a.m., Corzine received the information telling him that customer funds were missing. That alarmed Interactive Brokers, and the firm walked away from the bargaining table.

A MF Global executive then notified the regulators, who were still camped in the firm's Manhattan offices. Commodity Futures Trading Commission officials called Gensler, waking him around 2:30 a.m. to join a conference call with MF Global and other regulators.

MF Global executives could not stay on the phone for long — they needed to convene the board and prepare for a bankruptcy filing.

But the phone line remained open for several hours, as regulators discussed how to handle the first major financial failure of the postcrisis era.

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