Last October, MF Global disappeared in a weekend and, despite being held in supposedly segregated accounts, so did about $1bn of its customers' money. MF had been run for the preceding 18 months by Jon Corzine who - some considerable time previously - had been the boss of Goldman Sachs. Although Mr Corzine was reputedly pushed out of Goldman Sachs and had not subsequently enhanced his reputation, he was not laughed out of court when he pitched up at MF Global and vowed to transform it into "a full-service investment bank".
The awful truth about this venture and the subsequent pile-up has been slowly emerging ever since, as a steady stream of MF Global's staff have related their experiences to an investigating committee of the US Congress. But the whole debacle has now been published in consolidated form by James Giddens, the court-appointed trustee who is gathering in the money and doling it out to the creditors. His 259-page report emerged on Monday and is readily available online.
You should start at Annex A on page 192, which displays the unenviable circumstances when Mr Corzine arrived. MF Global's main source of income had always been interest earned by lending its customer funds to borrowers of high regard. In the year to March 2008 such interest had totalled $3bn. But as US interest rates collapsed after the credit crunch, interest income fell by two-thirds in a year, then by more.
Ex -bond trader Mr Corzine decided the answer was to invest in government bonds issued by Italy, Spain, Ireland and Portugal (but not Greece). These could be bought at bombed-out prices, and Mr Corzine reckoned that if he stuck to maturities under two years, they would be repaid in full. And most of the capital required to buy them could be rustled up by depositing the bonds with banks. He delivered a trenchant defence of this strategy when he was called to account for himself on Capitol Hill last December. And as regards repayment in full at maturity it has not - yet - been found wanting.
But, oh dear, the small amount of money MF had to put up for each bond, plus possible top-ups in collateral… where was that going to come from? Mr Corzine regularly tussled with his board to increase the portfolio of euro bonds. Eventually, MF owned $7bn-worth of them. Sometimes, the float MF Global needed to stay in the game ran past $500m: money it did not have. Very early on the challenge of financing this portfolio was pointed out by MF's chief risk officer. Soon after, he was sacked.
Now, wouldn't you know it, but the amount of customer capital required to be kept in segregated accounts - which had to be reported to regulators every day - could be calculated by several different methods, which threw up diverse figures. MF Global had traditionally used a conservative method, but as the financing needs of the euro bond venture grew, historic norms were first compromised, then discarded.
In July 2011, push came to shove in the form of a proposal for a regular overnight loan of $250m. James Giddens describes this as: "A dramatic change from then-current practice". MF's number three financial person, one Christine Serwinski, emailed the chief finance officer recording her serious discomfort that "client assets may be out at risk even if overnight". But despite scouring the rule books, she could not find a rule to frustrate a proposal emanating from chief executive Corzine. Within days, the "overnight" basis turned into a permanent basis to the extent of at least $53m.
Thus client funds were systematically first compromised then threatened. And as word of MF's straightened circumstances emerged into the marketplace, depriving it of normal borrowing facilities from counterparties who feared the worst, client funds were actively misappropriated.
The report describes in numbing detail the dramatic events of the last few weeks when MF was in meltdown and the misappropriation exploded. But if you read the report up to page 90, you will surely agree with me that Mr Giddens hardly needed to bother with the rest.
Once the compromising of client funds had been normalised at the behest of a dominant chief executive, the collapse was as inevitable as night following day. MF probably had no prospect of an independent future from any time after 2008. But it did not need to hurt its customers. The answer to all this is, as I've opined many times before, strict liability for executive directors. If you were there, you were guilty.
