Fallout over the late-October bankruptcy of MF Global Holdings Ltd. — the eighth largest in U.S. history — has spawned FBI and Justice Department investigations and left many wondering how, in the wake of supposed Wall Street reforms, government oversight of another financial institution was so lax.

More importantly for the agriculture sector, the bankruptcy and government response has prompted many questions about the safety of futures trading. That’s largely because MF Global customer accounts have been frozen and the threat of hard-earned farmer/rancher funds may be lost.

MF Global has reportedly “lost” customer funds – frequently cited in the $1.2 billion range – through a suspected series of unusual, perhaps illegal, transactions. Former MF Global Chairman and CEO, Jon Corzine (once New Jersey governor and senator) has a long list of questions to answer.

Promising vigorous examination of MF Global’s failing, the Senate Agriculture Committee – with oversight jurisdiction on commodity trading and its regulatory agencies – has scheduled hearings on Dec. 1 and Dec. 13.

“The farmers, small business owners and others who trusted this firm are now facing tremendous hardship and may ultimately never recover all of their money,” said Michigan Sen. Debbie Stabenow, Senate Agriculture Committee Chairwoman. “A discovery of this magnitude demonstrates yet again the need for strong oversight and protections for consumers to prevent this sort of abuse from occurring. Anyone engaged in wrongdoing in this matter must be swiftly held accountable, to help bring justice to victims and to prevent further erosion of confidence in the financial system.”

One thing customer advocates learned from the Wall Street collapse and government bailout several years ago is to get involved early. The newly-formed Commodity Customer Coalition was a quick response to the MF Global bankruptcy.

On Monday, Farm Press spoke with John Roe, who with several others formed the coalition. Roe, a principal at BTR Trading Group, explained the bankruptcy proceedings, questioned the actions of regulators and Corzine, and spoke about how farmers and ranchers have been affected. Among his comments:

On the basic facts of the case…

“In late October, MF Global released its earnings (report). That showed it missed its earnings and posted a fairly large loss of $198 million, or so.

“It was also revealed that it had an enormous exposure to European sovereign debt. That was relatively new and was a proprietary position taken by the firm.

“Jon Corzine was put in charge of MF Global about 18 months ago. He was supposed to reposition the firm not just as a futures-clearing merchant and broker/dealer but as more of an investment bank. In doing that, he began taking proprietary positions for the firm. That added a great deal of risk to the firm – but was also supposed to add a great deal of profit and profitability.

"The reason this really happened is because we’re in a low interest rate environment. FCMs (Futures Commission Merchant) make most of their money by holding customer collateral and earning interest on it. Well, when real interest rates are really negative, they seek other means to make money. Otherwise, there’s not a lot of opportunity for them.”

During the last week of October “it became clear -- because the stock fell to $1 per share and there was about a 70 percent loss in value a couple of times – MF Global would probably have to seek bankruptcy protection. Over the weekend of October 30, MF Global sought to sell its futures division to someone and put the rest of the entity into Chapter 11 reorganization bankruptcy.

“Sometime in the middle of the night heading into October 31, the CME Group – the exchange that’s MF Global’s designated self-regulatory organization (with audit authority) – said there was some sort of shortfall in customer funds. They were trying to ascertain why and how large it was.

“MF Global had been negotiating with Interactive Brokers (another futures commission merchant) to sell the futures division and move out the accounts. If they’d done that, there wouldn’t have been an interruption in trading and frozen accounts. The commodity accounts would have moved over to Interactive Brokers and MF Global would have gone into bankruptcy.

“But the shortfall in funds was noticed and Interactive Brokers balked. They said ‘we’re walking away.’ That’s when all hell broke loose.

“For an hour, the CME shut off all trading on MF Global. That caused enormous problems and then they went to liquidation only.”