Parallels are now being drawn between the collapse of brokerage firm MF Global and Enron. The similarities are unsettling. Like Enron, MF Global executives are claiming they don't know what happened with the money and how it disappeared. So who authorized the transfer of millions in customer investments just before the collapse of MF Global? No one seems to know, or at least they're not saying anything. MF Global filed for bankruptcy on Halloween, October 31, after a $6.3 billion bet on the bonds of some of Europe's most indebted nations went bad, making it the first big company failure that was created by the European meltdown. As much $1.2 billion of customer money went missing, maybe more. Those deposits should have been kept segregated from the company's funds. They weren't. And as I indicated in my report here , there is now evidence that the company's then chief executive Jon Corzine gave instructions to tap into $200 million worth of customer money to keep the company afloat. It didn't work.
MF Global executives are keeping their mouths shut. The New York Times reports that they took the Fifth when they appeared before a Congressional hearing. "Edith O'Brien, an assistant treasurer of MF Global, continued her silence before the oversight panel of the House Financial Services Committee on Wednesday, as she invoked her constitutional right against self-incrimination. A standoff ensued as lawmakers hurled pointed questions about transfers of customer money that Ms. O'Brien oversaw. But Ms. O'Brien did not take the bait. 'On the advice of counsel, I respectfully decline to answer based on my constitutional rights,' Ms. O'Brien said, appearing to clutch a cross in one hand as she rebuffed lawmakers again and again. Her silence was not well received by lawmakers."
Congressman Michael Capuano has compared it to Enron, and he's absolutely right too. "This reminded me of a hearing we had…on Enron," where no one would admit to anything,'' he said.
There's another reason why MF Global is like Enron. Just as Enron did before, the bankrupt brokerage firm took advantage of a totally legal accounting trick to keep certain financial obligations off its books, making the firm look less indebted and thus less a risk than it really was. The off-balance sheet accounting allowed MF Global to use borrowed money to make billions of dollars in ultimately catastrophic bets on European sovereign debt – and obscure the risk those bets posed to the company and financial markets.
All of which goes to show that we have learned nothing from Enron, and the system still needs to be fixed.