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Ed. Note: My colleague Jerry Hagstrom, acclaimed agriculture journalist and author of the subscription-only The Hagstrom Report, has allowed this cross-post of a report from a Senate hearing on Thursday that was dominated by issues related to the MF Global bankruptcy.
The House Agriculture Committee, led by Chairman Frank Lucas, R-Okla., today voted unanimously to subpoena MF CEO Jon Corzine for its hearing next Thursday on the bankruptcy.
MF Global Troubles Dominate Senate Hearing
By Jerry Hagstrom
The bankruptcy of MF Global, the missing $1.2 billion from its customer accounts, and whether futures markets are safe places to transact business may have become bigger issues than the next farm bill in rural America, but neither federal regulators nor senators on Thursday seemed able to reassure farmers and other users of the futures markets that those markets are safe right now.
At a Senate Agriculture Committee hearing, Sen. Max Baucus, D-Mont., was one of many senators who noted that his office has gotten calls about farmers and other businesses whose money is tied up. Baucus said that grain growers in Montana are meeting this week, but “The talk there is not the farm bill, it’s MF Global,” Baucus said.
“This is not an academic exercise for a lot of people,” Baucus said, noting that Montana farmers and traders have either lost money or can’t get their hands on it. Cases like this, he said, show “greed without adult supervision — private or governmental. How can you say trust the system? There was a failure to segregate accounts.”
Sen. John Thune, R-S.D., noted that the lack of access to funds and fear are stopping normal business. “Hedging is nearly as important as growing a crop,” Thune said.
While MF Global’s securities customers will be protected by $500,000 in federal insurance, there is no insurance program for futures accounts.
The hearing’s formal topic was implementation of the Wall Street Reform and Consumer Protection Act — better known as the Dodd-Frank financial services bill — but almost all of the hearing was devoted MF Global, a New York-based trading company whose bankruptcy has affected agricultural businesses throughout the country.
The bankruptcy occurred after the firm’s purchases of the debts of troubled European countries came to light. Some of those debt instruments were purchased with customers’ funds that were supposed to be segregated in their own accounts. A trustee is now in charge of the firm’s assets.
Senate Agriculture Committee Chairman Debbie Stabenow, D-Mich., noted that the farmers, ranchers, co-ops, small businesses, and individuals who use these markets to hedge their business risk have had their confidence shaken.
“The MF Global bankruptcy underscores the importance of having effective oversight in all of our financial markets. We need these markets to function properly, and we need consumers to have faith in them,” Stabenow said.
But when asked whether farmers should have confidence in the futures markets, Stabenow very carefully said, “I understand people’s concerns. Over the history of our country, there have been very few situations like this.”
Congress and the Commodity Futures Trading Commission “need to make sure the loopholes are corrected” because farmers and other businesses “need to be able to use the system,” she said.
Baucus asked Commodity Futures Trading Commission Chairman Gary Gensler how he would go about reassuring rural Americans that they can use the markets.
Gensler, who has recused himself from active involvement in the investigation because he worked with MF Global CEO Jon Corzine at Goldman Sachs and with him on the Sarbanes-Oxley financial regulation bill, said he would not talk about the MF Global case specifically, but that the CFTC “would turn over every rock and every corner” to increase transparency in the markets.
“Segregation of funds is at the core of the customer protection regime,” Gensler said, noting that the commission will take up two rules on Monday that he believes will improve customer protection. He also said the agency is examining its audit and enforcement program and its regulation of foreign boards of trade.
Gensler also said he believed the CFTC was wrong to grant firms an exemption from normal rules that allowed them to loan money from one branch of the firm to another, which apparently was how MF Global used customer funds to buy foreign country debt.
Sen. Kent Conrad, D-N.D., noting that those exemptions and the rules were imposed long before Gensler arrived at the agency, said that the accounting system that allowed MF Global to hide the purchase of the foreign debt should be outlawed.
Gensler also noted that the futures market has grown five-fold in recent years while Congress has refused to give the CFTC the money it needs for a more vigorous enforcement mechanism.
For fiscal year 2012, Congress has increased the CFTC budget only $3 million, from $202 million to $205 million. The agency needs a 40 to 50 percent increase over the coming years to buy modern computer equipment and hire more staff, Gensler added. He also noted that, while the Securities and Exchange Commission has 300 examiners, the CFTC has fewer than 20.
Gensler said the agency relies on the Chicago-based CME Group and other private organizations to monitor the industry, but should do annual examinations of clearinghouses and engage in other industry oversight. The agency can write the new tougher rules mandated by the Dodd-Frank law, he said, but won’t have the money to enforce them.
Senate Agriculture Committee ranking member Pat Roberts, R-Kans., said that the MF Global case “has nothing to do with Dodd-Frank.”
Securities and Exchange Commission Chairman Mary Schapiro told Sen. John Hoeven, R-N.D., that Dodd-Frank would create a process for a higher level of scrutiny of firms that could endanger the financial system, but said that provision has not yet been implemented.
Roberts repeatedly pressed Gensler on his decision to recuse himself and on when he made that decision. Gensler said that CFTC ethics officers had told him that he did not need to recuse himself, but that he decided that his previous association with Corzine would be a distraction from the investigation.
Roberts replied that he believed that Gensler’s decision to recuse himself amounted to a “dodge” and that he should have taken full responsibility.
Sen. Mike Johanns, R-Neb., said he agreed with Roberts, that Gensler was trying “to avoid the heat.”
Gensler has assigned Republican CFTC commissioner Jill Sommers to take charge of the MF Global investigation.
Sen. Charles Grassley, R-Iowa, who had called for Gensler’s recusal, thanked him for his decision. But he joined the criticism of the CFTC chairman in a press release after the hearing.
“Despite an effort from several of us, there wasn’t a lot of specificity from Chairman Gensler about exactly how and when the CFTC learned of the MF Global collapse and how and when he talked to Jon Corzine about the problem,” Grassley said in the press release. “It’s surprising that Chairman Gensler didn’t have a more precise timeline to offer during his testimony.”
When Johanns asked Gensler whether the CFTC was responsible for not protecting the MF Global customers, Gensler said he took his responsibilities very seriously.
When Johanns asked Sommers the same question, she said that since the investigation is still ongoing, “I can’t comment on whether what ends up being found is the fault of the regulator.”
Asked by Stabenow how they are monitoring the apparently worsening financial situation in Europe, both Gensler and Schapiro said they are working through regulators in other countries.
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Hagstrom's last post on Obama Foodorama was about the failure of the Supercommittee and its impact on agriculture. To subscribe to The Hagstrom Report, check out TheHagstromReport.com.
*Updated with Corzine subpoena information