MF Global: Where did the money go?

A follow up to a post about a month ago, here, about the Jon Corzine / MF Global scandal, which has the former New Jersey governor, and former Senator, testifying before Congress.

A billion dollars is missing. When I found out that this was cash, it was unbelievable to me. If you have ever worked with double-entry accounting, you know that cash doesn’t disappear unless somebody steals it. For every cash entry, there is a second record showing something about where the cash came from, or where it went. So all I could think of was that someone “journaled” the cash out of things called separate accounts, and into MF Global’s main account. This looks like borrowing, but, depending on the circumstances, it is actually more like stealing than borrowing.

A “separate account” is a customer account where the assets in it have to be kept separate from the business of the broker. That cash is not there to cover the liabilities of the broker, or to make involuntary loans to the broker.

As the MF story is coming out, it looks like someone high up told someone down below that it would be a career-advancing idea to journal separate account money–the client money–into the main brokerage account. A BIG NO-NO. This is why many people feel that we’re basically going to have to have government agents posted to every financial firm out of Wall Street to keep the Street honest.

I just can’t help but think about Harold Hoffman, a former New Jersey governor who “borrowed” from the state’s unemployment trust fund in the 1930’s and got caught. Although I don’t think there’s anything proven against Corzine, I bet that when the story comes all the way out, it is going to sound like Harold Hoffman’s. Hoffman had said that once he got into politics, the friends keep you in there, and they expect favors. You work with the system, and then, soon enough, you find you owe a lot of favors to people, and you need money to keep it all going.

If what I suspect is going on with MF Global is true, it is going to be that if you want to run hedges, you need solid creditors who will back you. The minute your creditors start getting nervous about whether their portion of your business will be paid back, you need to find more friends. In the hurry and excitement of finding new creditor-friends, lines get crossed, and the next thing you know, you are “borrowing” money that looks a lot like stealing.

[More in a bit.]

[Update 12/17/11: Wouldn’t you know it? I found the first episode of “What’s My Line?” on YouTube, which featured, inter alia, the former Governor of New Jersey, Harold Hoffman. This was a couple of years before he was fingered, as director of the unemployment division of the state department of labor, for stealing money . . .