MF Global back on the hot seat

With former MF Global (MFG) executives in the on-deck circle, a group of farmers and members of agribusiness sat across the table from Senate Agriculture Committee members on Capitol Hill Tuesday to discuss the how they have been affected by the now-defunct broker's bankruptcy and alleged commingling of segregated customer money.

Senate Ag Committee chair Debbie Stabenow (D-MI) convened the hearing Tuesday in an effort to learn how MF Global's downfall has affected the farmers, ranchers, grain merchants and others who had invested in MFG before its bankruptcy filing earlier this fall. Since then, up to $1.2 billion of customer funds has been lost through commingling with proprietary investment money and whether that was done in error or intentionally.

"Our farmers and ranchers have lost trust in the system. They believed that there were safeguards in place to protect their money in exactly this situation," Stabenow said Tuesday morning. "A fundamental principle of futures trading is that customer money must always be kept separate from the firm's money."

Committee members and those testifying Tuesday agreed the recovery of 100% of those lost funds should be the top priority in resolving the MFG situation.

"This has had a real effect throughout the industry -- you've got farmers double-margining and people at stress with their lending situations already, so it's imperative we get to the bottom of this," said C.J. Blew, a Moundridge, Kansas farmer and chairman of the board of the Mid-Kansas Cooperative Association. "I am here to ask the committee to make returning customer funds its top priority. The confidence in the system has been compromised, and it's imperative we restore the integrity of that system."

Blew was joined by Roger Hupler, president of Freeland Bean & Grain, a cooperative based in Freeland, Michigan, Jeff Hainline, chairman of Advanced Trading in Bloomington, Indiana, and farmer Dean Tofteland of Luverne, Minnesota, in testimony before the ag committee Tuesday prior to the lawmakers' examination of former MFG CEO Jon Corzine and the firm's former chief operating officer Brad Abelow and chief financial officer Henri Steenkamp.

"I have a customer who has more capital at risk than we do here," Hupler said, characterizing the men and women he's watched lose money from the MFG situation. "He is not a speculator, just a prudent operator. he is selling cash grain and using futures options to hedge risk."

Tofteland, who raises corn, soybeans and hogs, said the MFG situation shook even the most solid certainties in his business. "I called my broker. She said since my money was in segregated accounts, they would be safe," he recalls when learning of growing problems at MFG earlier this fall. "She said nobody's ever lost a cent from a segregated account. The following Monday, I read that customer funds were missing after MF Global filed bankruptcy."

The MFG meltdown left Tofteland locked into short positions he held leading up to the November 9 USDA Crop Production and world grain supply/demand estimate reports, and because his funds were locked up after MFG's bankruptcy and alleged commingling of client funds, he was unable to make adjustments to avoid heavy losses after the USDA data caused a sharp market shift.

"I was unable to adjust my short positions. This account also is my collateral for my operating loan. I ended up getting 15% of that money back," he said of the money he had held in MFG hands. I had to liquidate my hedges, and since [November 9], prices have dropped. I have had $100,000 lost."

In addition to the financial losses incurred by farmers and ranchers, there's also been a loss of confidence. Tofteland said he hasn't used the futures market since his MFG losses, and that's going to likely affect his farm's profitability for a while.

"We're still out a lot of capital, and to be involved here, you have to have collateral on the exchange. And, unfortunately, I had to liquidate my hedges and we've been unable to hedge since then," Tofteland told Senate ag committee members Tuesday. "I'm looking ahead to my input costs for next year and I just don't have much confidence until I get 100% of my cash back."

For those who continue to stay involved in hedging and futures trading, Hainline told the committee there's another changing condition that will likely hamper the efficiency of futures trading. He has clients asking for more than one futures commission merchant (FCM) to essentially hedge against the risk of hedging.

"Numerous clients are asking about having more than one FCM so at a moment's notice, when somebody throws up a red flag, they can transfer," Hainline said. "The inefficiencies of that are major. But, people are going to those lengths to protect their money."

MFG execs without answers

After a session targeting those affected by MFG's alleged misconduct, the firm's former leadership took to the microphones to answer ag committee members' questions. As in last week's testimony before the House Ag Committee, former CEO Jon Corzine said he was simply without answers on the client funds that are now missing.

"I never gave any instructions to misuse those funds," Corzine said Tuesday in reference to client money that was mandated to remain segregated from the firm's proprietary investment capital. "I was stunned to lose hundreds of millions of dollars. My embarrassment does not blind me to the fact that they (the investors) bear the brunt of the firm's bankruptcy."

Neither Corzine nor former CFO Henri Steenkamp or former COO Brad Abelow said they were aware of any potential illegal use of the firm's client funds. And, none said they knew where the funds could possibly be.

"I know this committee is interested in finding those commingled funds. I am deeply troubled customer funds are missing. I share the interest in finding where those funds are," Abelow said. "I do not know the answers to those questions. I do not know."

At the root of the issue, Abelow says, is the way MFG fell. The former COO says it wasn't until mid-October that MFG's credit rating was downgraded and clients created a "run on the bank," stripping the firm of cash it needed to hold its market positions. That run on the bank in such a short time period leading up to the firm's bankruptcy declaration is what's making the search for the missing client money so difficult. But, once those records can be examined, Corzine says he and other MFG leaders should have more answers.

"Enormous numbers of transactions were taking place in those final days," Corzine said Tuesday. "About 38,000 customers in many countries. All those need to be parsed through to arrive at an answer. It's a very difficult task."

Added Abelow: "I do not know where the money is. As of the filing of bankruptcy, there were investigations underway. We have not had access to the results of that investigation or any information about the status of that investigation. I am as anxious as you are to see the results of that investigation."

Tofteland seemed to doubt such uncertainty about the fate of MFG's missing client money. So, he's going to continue raising questions about the firm's behavior leading up to its demise in hopes that at some point, he can close this episode.

"What happened to the money? This was real money in banks and now it's missing. I know in your personal bank account, the bank knows if you're overdrawn by a penny," he said. "Somebody knows where the money's at. If there's a debit, there's got to be a credit. Where's the credit?"