What Happened At MF Global

Bruce Krasting takes a look at Jon Corzine's testimony in Congress (h/t Yves Smith).  He discusses what happened to a friend of his who had a few small accounts at MF Global, and tries to speculate about where the money went:

At this point, anything is worth considering. We are six weeks past the BK. As Corzine and all the others said today, they have no clue where the missing money is. There has been any army of forensic accountants (FBI & KPMG) toiling night and day. No one has found the money. That's crazy to me.

A possible daisy chain:

(1) MFG orders XYZ Bank to make a money transfer.

(2) XYZ makes the transfer.

(3) After the transfer has been made (or during the same day) XYZ issues a letter of indemnity (“LOI”) and obtains a refund of the transfer.

(4) The initial wire transfer is accounted for (correctly) at MFG as a reduction of the customer account liabilities (Segregated account).

(5) When the money comes back into XYZ (pursuant to the LOI) it is not credited back to the Seg./customer account. (The fog of war factor? Deliberate?)

(6) After the money has been returned to XYZ bank, it appears to be "unrestricted funds" of MFG. It gets commingled. Someone grabs the money to offset a claim. The Chinese Wall between the Seg. account and MFG corporate account has been broached. Once the money is commingled, it is impossible to figure out who owes what to whom.

In the disastrous final days at MF Global, I could see something like this happening accidentally, or intentionally.  I wouldn't doubt that some of the large creditors, who might have been handling wire transfers (JP Morgan anyone?) would intentionally make this sleight-of-hand assuming that nobody will be able to wind their way back through all the last-minute transactions and figure out what's going on.  If somebody does discover it, the bank says, huh, guess we made a mistake.  If they don't find it, it's the MF Global guys going to jail, not them.  They just jump ahead of the customers in the bankrupcy by stealing the funds.  It is a travesty that any business's books could be this bad.  The question I have is this, if MF Global were this poorly run on a basic business standpoint, but their Europe bets had paid off, wouldn't we be hearing about how smart these guys were, and how they earned all the money they made, because they were the ones willing to take the risk?  It is only because their bets went bad that anything comes of it.  Does anybody think that some people who have made winning bets have been risking customers money?  I would hope not, but I would guess that is a real possibility.