Episode Details

In October 2011, MF Global filed for bankruptcy with $1.6 billion in client funds missing. It was the eighth largest bankruptcy in US history. The funds were not stolen in the way Madoff stole. They were used — as collateral, to cover margin calls, through intraday transfers from the segregated pool that were supposed to be reversed before close of business and were not, because the firm capital that was supposed to fund the reversals did not arrive. Each transfer was individually justified as temporary. Collectively, they produced a permanent shortfall. Jon Corzine was former CEO of Goldman Sachs, former Governor and Senator of New Jersey. MF Global was a regulated broker-dealer.

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The European sovereign bonds at the center of the position — six point three billion dollars in Italian, Spanish, and Portuguese debt financed through repo-to-maturity — were disclosed in the SEC filings. The position was not secret. The leverage was not hidden. The funding cliff it created when the repo market closed was not modeled. This episode dissects the rehypothecation mechanism: the repo-to-maturity structure and its off-balance-sheet accounting treatment, the intraday transfer practice that made the segregated pool a conditional liquidity resource, the jurisdictional split between US and UK client money rules, and how the combination of those three features made the custody guarantee conditional on conditions that failed in the same week.