In MF Global, JPMorgan again at center of a financial failure

Wed Jan 18, 2012 7:28pm EST
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By Carrick Mollenkamp, Lauren Tara LaCapra and Matthew Goldstein

(Reuters) - In late October, as MF Global Holdings Ltd teetered toward bankruptcy, Jon Corzine phoned his close-knit circle of Wall Street friends for help.

His firm, facing demands from customers and other firms for cash, needed to sell billions of dollars in securities to raise the money. As the week progressed, MF Global executives came to believe that JPMorgan Chase & Co., one of MF Global's primary bankers and a middleman moving that cash, was dragging its feet in forwarding the funds.

Corzine phoned Barry Zubrow, then JPMorgan's chief risk officer, to question the slow payments. Corzine also called William Dudley, president of the Federal Reserve Bank of New York, to update him on MF Global's status and told him that payments were slow to arrive from JPMorgan and others. Dudley said he'd monitor the situation.

The delays contributed to a serious cash shortage at MF Global, according to people familiar with the matter. These people say the firm started trading one day in late October with $600 million in cash and spent the whole day selling securities, only to end with just $200 million in cash.

By adhering to procedure and not cutting MF Global any slack, these people say, JPMorgan was able to slow the delivery of funds, worsening MF Global's distress. As a result, they note, hundreds of millions of dollars of MF Global money may be still stuck in accounts at JPMorgan.

The details of MF Global's trading, based on court documents and multiple interviews with people familiar with the situation, shed light on what could have happened to more than $600 million in customer funds at MF Global, which are still being sought by regulators nearly three months after the firm filed for bankruptcy protection on October 31.

An early sign that money was missing came as auditors from the CME Group Inc., which audited MF Global, combed through the company's books in Chicago and New York, according to congressional testimony by CME executive chairman Terrence Duffy. After MF Global reported a quarterly loss on October 25, the CME had dispatched two auditors to the Chicago office to review customer accounts on October 27 - the first of several confusing days as auditors and regulators, working in Chicago and New York, tried to understand whether funds were intact.

In a statement last week , a JPMorgan spokeswoman said, "Our firm lost money because of MFG's failure, and we are cooperating with the regulators with full transparency to assist their investigation."   Continued...