Econintersect: An Associated Press article today (Thursday, November 3) details an example of the workings of the “old boys’ network” in the U.S. government- financial system network. The AP article by Daniel Wagner (from the Florida Times-Union) details the relationship between MF Global CEO John Corzine (pictured) and the lead regulator investigating the collapse of the company. In the course of the decline and collapse of MF Global it has been reported that over $600 million of clients’ money has “disappeared” (Reuters).The question of cronyism arises because Gary Gensler, chairman of the Commodity Futures Trading Commission, has the lead role in investigating the failure of MF Global. Gensler has a significant history with Corzine:
- Gensler was co-head of Goldman Sachs finance, leaving in 1997 when Corzine was chairman and CEO of the company.
- Gensler and Corzine also worked together in Washington when Corzine was a U.S. senator from New Jersey. Gensler was Assistant Secretary of the Treasury (1977-1999) and Under Secretary of the Treasury (1999-2001).
Gensler said CFTC staff has been on-site at the firm since last Thursday, and took part in calls in the middle of the night with other regulators about the fate of the firm.
“The first time that we actually knew there was a shortfall for me was when I got woken up 2:30 a.m. Monday,” Gensler told reporters after testifying to the Senate’s Permanent Subcommittee on Investigations on Thursday.
So far, the long hours have failed to turn up much in terms of money — and that may not be an accident. CME Group , the biggest U.S. futures exchange operator, has said that MF Global appeared to have made “transfers of customer segregated funds in a manner that may have been designed to avoid detection.”
The final statement, if confirmed by investigation, would clearly document a case of control fraud. The question would then be: Was Corzine complicit in the fraud in any active way or is he guilty of abetting control fraud by reason of incompetency. Using an analogy of a capital crime, would Corzine be guilty of first degree murder or a lesser change of second degree murder or manslaughter? This is a critical question because it appears that the missing client funds are equal to most of the bankruptcy shortfall of the company (Reuters).
According to the AP article, Professor Jay Lorsch of Harvard Business School says Gensler should recuse himself from the investigation because their ties could present the appearance of a conflict of interest or bias.
The other agency that will be involved in regulatory investigation is the SEC (Securities and Exchange Commission). The question still open is whether there will be a referral to the FBI and the Department of Justice. No referral by Gensler could further raise the conflict of interest question.