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December 18, 2011

The MF Global Post Mortem: Balance Sheet Shows Why Customer Money is Missing

I hit the Edgar database to take a quick look at the MF Global financials. I was looking for anything that would hint to the shortfall in customers funds. The sad part of my analysis is that it seems to be completely obvious as to why customers are having a shortfall- the company did not designate enough reserve funds to cover what they owed to customers.

On the balance sheet, MF Global has a restricted cash account. Usually, restricted cash accounts are used for specific liabilities. In the case of MF Global, the restricted cash account was used to pay back money owed to dealers and customers. In the 2010 MF Global 10-K, (fiscal year ending Mar 31, 2011) which Jon corzine signed as CEO, MF Global had a combined $12 billion in cash and restricted cash ($11.3 billion in restricted cash).

In the liabilities of the 10-K, MF owed $14.6 billion in liabilities to customers and dealers ($13.5 of which to customers). Clearly, the company did not have the cash to reimburse all of its counter-parties in the event of a sudden bankruptcy. While the numbers suggest a $2.6 billion gap, it would make sense that the company has the ability to sell some of the current assets (securities) on its balance sheet to cover that gap.

In early August, MF Global filed its first quarterly 10-Q for the period ending June 30, 2011, their last filing and four months before their bankruptcy. In this report, cash and restricted cash equaled $11.6 billion while liabilities to customers and dealers was $15.2 billion. The shortfall grew to $3.6 billion.

In addition to the increase in shortfall between cash available and customer liabilities, the company began buying securities that it was to resell, some of which that it was going to buy back in the future. The company committed $2.5 billion to this activity in the first quarter of 2011 (Apr 1 to Jun 30).

The sad part of all this is that MF Global filed this information under the noses of multiple regulators. Once again, the SEC did nothing to flag this problem and Frank-Dodd was even less proactive. This leaves an important question for this industry, where else is this going on?

The other question is that if Jon Corzine is not charged with a crime, what's the usefullness of Sarbanes-Oxley?

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