Many Alarms Rang Before MF Global Crashed

David Goldman for The New York TimesJon Corzine, second from right, held a morning meeting on the trading floor of MF Global’s Manhattan office last year.

A little before 2 a.m. on Monday, Jon S. Corzine was in MF Global’s offices in Midtown 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 Mr. 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 Federal Bureau of Investigation 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 on Wednesday that Mr. 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 early Monday morning, shortly before the firm filed for bankruptcy.
A person close to the company said it was not aware of any audit by the CME Group. Neither Mr. Corzine nor MF Global have been accused of any wrongdoing.
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.
The disclosure alarmed the Financial Industry Regulatory Authority, 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 Mr. Corzine fought back, according to the person with knowledge of the matter. Frustrated, Mr. Corzine decided to go over Finra’s head to the Securities and Exchange Commission, the person said. In July, Mr. Corzine traveled to Washington to state his case to S.E.C. officials at their offices near Union Station in Washington. Mr. Corzine chalked up their concerns to undue jitters over Europe’s ballooning debt crisis, the person said. The S.E.C. and Finra wouldn’t bend, and in August, the firm increased its capital cushion.
MF Global declined to comment; Mr. 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, questioning whether anxious customers, investors and trading partners would drain the firm’s liquidity.
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 Washington and Wall Street, MF Global moved up its scheduled quarterly earnings announcement by two days, reporting on 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.
Mr. Corzine quickly 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.
Mr. Corzine had other fires to put out.

Joshua Roberts/Bloomberg NewsThe Commodity Futures Trading Commission, led by Gary Gensler, is said to have become concerned in late October.

Last 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.
On Saturday, Mr. 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. During the tumultuous days of 2008, Mr. Cohen advised a number of embattled Wall Street executives, including Richard S. Fuld Jr. of Lehman Brothers. He now found himself counseling Mr. Corzine.
“We need more documents,” Mr. 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. Two main bidders quickly emerged — the Interactive Brokers Group and Jefferies Group. Jefferies, a brokerage house based in New York, has a futures trading business and the idea of expanding it is said to have appealed to its chief executive, Richard Handler. A small team of Jefferies executives arrived at MF Global on Friday and were escorted into a windowless conference room. The executives 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 separate windowless conference room not far from where the Jefferies team was holed up.
Mr. 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. One person who saw him Saturday said he looked “pained” at the events unfolding around him.
Around 2 p.m. on Sunday, Mr. Corzine and an Evercore banker, Jane Gladstone, were able to call regulators and brief them on the sale talks. They sounded optimistic, saying that they were confident a deal would get done.
That hope grew into the evening.
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 on Sunday wearing mismatched shoes.
Just before 1:45 a.m., Mr. Corzine received the information telling him that customer funds were missing. That alarmed Interactive Brokers, and the firm walked away from the bargaining table.
An MF Global executive then notified the regulators, who were still camped in the firm’s Manhattan offices. Commodity Futures Trading Commission officials called Mr. 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.
Azam Ahmed contributed reporting.