On Corzine - MFG in the Fog of War

I watched Jon boy. I didn’t hear any smoking guns. That doesn’t mean there weren't any. Keep in mind that Corzine has the best lawyer (for this) that money can buy. Andrew Levander has been advising the former CEO of MFG on every word he says.

I was surprised that there was no 5th Amendment stuff. I’m sure that Levander was pushing for that. But Corzine really didn't have much of an option. If the former Senator/ Governor pled the fifth he would have been convicted in the public’s eye.

So Jon talked, but he said nothing. You can be absolutely certain that Corzine spent many hours with his lawyers fielding question that might have been asked by the congressional committee. When Corzine seemed to stutter, pause, look up at the ceiling groping for the right words to use, it was just a very well orchestrated and practiced acting job.

Jon made one response that I thought was significant. He said several times:

"I never intended to break any rules.”

This could mean anything, but consider that this canned response was formulated word for word by Levander. I think what Corzine was saying was that he may have authorized some actions in the later stages of MFG’s existence that ultimately led to the expropriation and loss of customer funds. He is trying to establish that whatever he may have said (or signed), he did not understand the consequences. Whether this is true or not, I don't know. We might find out at some point that some clown in the treasury department at MFG asked JC a question in the middle of the panic:

“We could re-hypothecate the seg accounts and plug the gap tonight! Should we do that?”

And Jon could have looked up and said:

“Do what you can!”

The problem with the “I never intended” defense is that it doesn’t work for a CEO who should have know better.

I recently had a conversation with an individual (we'll call him Bob) who had three MFG accounts. He, like many other customers, smelled a rat with MFG as the stock price plunged and the FINRA issues with the Euro bond positions became known.

Bob voted with his feet. He closed off all open positions. He got back to cash. Then he requested a wire transfer for the balance(s). He left a small operating balance in the accounts in order to keep them open. This fellow was small potatoes. Two of the accounts were under $20k. The other was $215k. Wire transfers to a bank were requested.

According to Bob, the wires went out on Wednesday, October 26 (four days before BK). All three wire transfers were received on Thursday October 27.

But on Friday, October 28, the bank that had received the funds reversed the wire transfer for the larger amount. The transfers for the two smaller amounts were not reversed.

This is highly unusual. It is extremely difficult to reverse a wire transfer. Wire transfers are considered to be Immediately Available Funds or “Good Funds”. Absent a court order, the only way to reverse a wire transfer is when the remitting bank provides a letter of indemnity ("LOI") to the receiving bank. I’ve written these letters. They would look something like this:

To: ABC Bank
From: XYZ Bank
Reference: Wire Transfer #123456 date 10/26/2011 for $215,000 for further credit to "Customer Name", Account #AB3355

We hereby request that you immediately debt the account of (Customer Name) for the full amount of the transfer and return the funds to us.

If you comply with this request we hereby agree to hold you free and harmless of any consequences that may arise as a result of this request.

XYZ Bank

Basically XYZ has to give ABC a blanket guarantee that they will not get hurt by the request.

Here’s the rub. I’m told that in the matter at hand, the "XYZ" bank operating on behalf of MFG was JPM.

If I’m right that a LOI was required to claw back a wire transfer, then - assuming my information is correct, and I think it is - it had to have been JPM that wrote the indemnity letter.  (No one would have acted on a LOI from MFG on 10/28).

I'm speculating quite a bit. But it’s still worth considering. 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.

A question for any of those many MFG account holders: Did any of you have a similar experience with wire transfers? If so, could you let me know? I’d love to get to the bottom of this mystery.

Note: I'm aware that in the final days, MFG issued checks to customers that bounced. This is similar to the wire transfer issue I describe. But it is also a different kettle of legal fish. There are many reasons for a check to bounce. Checks, unlike wire transfers are not "good funds".  To claw-back a wire transfer requires significant human intervention. Banks do not write LOIs without carefully considering the consequences. There's always a signature on an LOI......