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Wall Street Journal: Corzine and his regulators

Section: Daily Dispatches

Mr. Corzine and His Regulators

MF Global and the New Era of Crony Capitalist Regulation

From The Wall Street Journal
Thursday, December 1, 2011

More than $1 billion of client money is still missing at failed brokerage MF Global, according to the bankruptcy trustee's latest estimate. At Thursday's hearing of the Senate Agriculture Committee, the company's principal regulator will try to explain how his agency failed to provide the most basic protection for financial consumers.

Gary Gensler, chairman of the Commodity Futures Trading Commission (CFTC), has a lot of explaining to do. Segregating customer money—protecting client accounts from being raided by an unscrupulous broker—is even more important in the futures industry than it is in other markets. In the world of stocks and bonds regulated by the Securities and Exchange Commission, it's terrible when client funds go missing, but at least the average investor has a backstop in the Securities Investor Protection Corp., which provides insurance up to $500,000. There is nothing like it in the futures industry, so if they do nothing else CFTC regulators have to make sure that nobody is digging into the customer cookie jar.

... Dispatch continues below ...


Sona Discovers Potential High-Grade Gold Mineralization
at Blackdome in British Columbia -- 13.6g over 1.5 Meters

From a Company Press Release
November 22, 2011

VANCOUVER, British Columbia -- With its latest surface diamond drilling program at its 100-percent-owned, formerly producing Blackdome gold mine in southern British Columbia, Sona Resources Corp. has discovered a potentially high-grade gold-mineralized area, with one hole intersecting 13.6 grams of gold in 1.5 meters of core drilling.

"We intersected a promising new mineralized zone, and we feel optimistic about the assay results," says Sona's president and CEO, John P. Thompson. "We have undertaken an aggressive exploration program that has tested a number of target zones. Our discovery of this new gold-bearing structure is significant, and it represents a positive development for the company."

Sona aims to bring its permitted Blackdome mill back into production over the next year and a half, at a rate of 200 tonnes per day, with feed from the formerly producing Blackdome mine and the nearby Elizabeth gold deposit property. A positive preliminary economic assessment by Micon International Ltd., based on a gold price of $950 per ounce over eight years, has estimated a cash cost of $208 per tonne milled, or $686 per gold ounce recovered.

For the company's complete press release, please visit:

It's still not clear in this case whose hands dipped into customer funds or why, but it's hard to imagine a financial firm raising more red flags than MF Global did under former Chairman and CEO Jon Corzine. A former New Jersey senator and governor, he took the top job at MF Global in March of 2010, four months before enactment of the Dodd-Frank financial reform law. The former Goldman Sachs chief had been out of the Wall Street game for a decade while he pursued his political ambitions, but MF Global shares rallied on the news of his hiring.

In a research note, Sandler O'Neill Partners wrote of Mr. Corzine: "We suspect that his contacts in Washington could prove useful as MF Global navigates a shifting regulatory environment." Those "contacts" included Mr. Gensler, a onetime colleague of Mr. Corzine at Goldman. In previous Beltway stints, the duo had helped to write the 2002 Sarbanes-Oxley law that was also supposed to protect investors.

While Mr. Gensler's CFTC was MF Global's primary regulator, the company also wanted to do business with the Federal Reserve Bank of New York, run by another Goldman alum, William Dudley. A year before Mr. Corzine's arrival, the New York Fed had considered designating MF Global as one of its prestigious primary dealers, but it decided not to.
Did MF Global benefit from Mr. Corzine's contacts?

Let's review the record.

In May 2010, on his first conference call with analysts, Mr. Corzine made clear he wanted to take big risks. "As he seeks to realign the brokerage, Corzine said MF Global will begin taking principal risk across most of its product lines," reported Dow Jones. In other words, MF would increasingly bet its own capital, instead of simply servicing clients.

MF Global created a new proprietary trading desk and hired a onetime employee of George Soros's hedge fund to run it. And Mr. Corzine began making the bets on European sovereign debt that would total $6.3 billion and eventually wreck the business.

MF Global's new trading frenzy might have attracted even more attention if Mr. Corzine hadn't hidden his biggest bets. His purchases of European government bonds added up to several times MF Global's entire market cap. But by using a "repo-to-maturity" technique, he was able to consider them "sold" for accounting purposes and therefore they disappeared from MF Global's balance sheet.

Except they hadn't really been sold. They were used as collateral to borrow money, and if the value of the bonds declined, MF Global would have to post additional collateral. How much more? Markets eventually decided that it was enough to destroy the company, and MF Global's funding dried up.

Keep in mind that both Dodd-Frank and Sarbanes-Oxley, written by Mr. Gensler and others, were supposed to protect investors from such shoddy disclosure. In any event, even the numbers Mr. Corzine was disclosing were terrible. In November 2010, MF Global announced its sixth loss in its last seven quarters. In February 2011 the company reported more losses.

Yet just before the announcement of another bad quarter came news in February 2011 that the New York Fed had changed its mind and bestowed upon MF Global the coveted title of primary dealer. The New York Fed doesn't publicly discuss such decisions, but a source with knowledge of the process says that it sometimes takes several years for a firm to gain acceptance. We hope Congress investigates both the decision and its curious timing.


MF Global customers are still waiting to be made whole, but the larger importance of this story relates to the effectiveness of the Dodd-Frank, Sarbanes-Oxley regulatory model. Americans have been told that, in response to the 2008 financial crisis that regulators failed to predict or prevent, regulators needed to have vast new powers to prevent the next crisis. But in MF Global the regulators failed the law's first serious test.

MF Global also shows how this new era of regulatory power puts a premium on political connections. Mr. Corzine was named CEO of the company in part—maybe in substantial part—because he had close ties to regulators and could help MF Global navigate the many new rules. This is the new financial crony capitalism, and it also failed its first test. The mistake is to believe in regulator prescience, as opposed to simpler, straightforward rules on, say, leverage or capital.

Mr. Gensler, for his part, has a response to the cronyism charge. Since the firm went bankrupt he has announced that he will recuse himself from issues affecting MF Global.


Congressman Randy Neugebauer sent a letter to Mr. Gensler this week, and Wednesday night Senator Richard Shelby contacted the CFTC's inspector general seeking an answer to the question of how and when Mr. Gensler decided that recusal was appropriate. This is another answer Mr. Gensler should bring to today's hearing.

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Prophecy Granted Landmark Chandgana Power Plant License

Company Press Release
Monday, November 21, 2011

VANCOUVER, British Columbia -- Prophecy Coal Corp. (TSX: PCY)(OTCQX: PRPCF)(Frankfurt: 1P2) announces that its wholly-owned Mongolian subsidiary, East Energy Development LLC, has received the license certificate from the Mongolian Energy Regulatory Authority to construct the 600-megawatt Chandgana power plant.

This 600-mw thermal power plant license is the first of its size issued by the Mongolian government. To ensure strict compliance with Mongolian laws and regulations in obtaining this license, Prophecy retained Mongolian and international consultants over the past 18 months and spent much effort on community relations.

Coal for the Chandgana mine-mouth power plant will be supplied from Prophecy's Chandgana Tal deposit, for which the company has already obtained a full mining license. Tal contains 141 million tonnes of measured coal and is located just 9 kilometers north of Prophecy's Chandgana Khavtgai project, a deposit with more than 1 billion tonnes of measured and indicated coal.

Chandgana is 60 km from Underkhann city (East Energy System) and 150 km from Baganuur city (Central Energy System). Construction of transmission lines linking the two cities through Chandgana is seen as a top priority for a much-improved and more efficient national Mongolian energy system.

John Lee, chairman and CEO of Prophecy Coal, says: "Prophecy has distinguished itself as the premier candidate to build the next Mongolian thermal power plant. There is an understanding among all stakeholders that Mongolia, being one of the world's fastest-growing economies, needs additional power. With the International Monetary Fund projecting a deficit for Mongolia of more than 600 mw by 2016, this need has become urgent and can no longer be delayed."

For Prophecy Coal's full press release, complete with maps, please visit: