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CEO Jon Corzine, center, at MF Global last year: A Senate panel Thursday grilled regulators about how loopholes let farmers’ commodity trades end up in risky bonds.

David Goldman, New York Times

MF Global woes ripple into heartland

  • Article by: JIM SPENCER
  • Star Tribune
  • December 1, 2011 - 10:29 PM

Dennis Magnuson is a farmer, not a gambler. He trades in the commodity futures markets hoping to stabilize the cost of feed for the pigs he sells. The Austin, Minn., resident said he would never put his money into bonds issued by European countries flirting with economic collapse.

But the now-collapsed MF Global Holdings Ltd. may have done that for him.

Magnuson is among more than 100 Minnesota farmers estimated to have assets frozen as a result of MF Global's bankruptcy filing and an estimated $1.2 billion in missing customer funds. Most of the farmers didn't choose to do business with the huge brokerage house that has become one of the biggest financial failures in U.S. history. They invested through brokers or financial advisers who eventually used MF Global to clear trades.

On Thursday, members of the Senate agriculture committee, including Minnesota Democrat Amy Klobuchar, grilled the heads of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) over apparent loopholes in rules that allowed farmers' commodity trades to end up in risky European bonds.

"[Regulators] are still investigating if what [MF Global] did was illegal," Klobuchar said in an interview after the hearing. "And it may well have been illegal. We don't know that yet. But what we know is that the law is inadequate when it comes to disclosing transactions like they made ... it is possible that they were able under existing law to hide those risky transactions."

MF Global filed for bankruptcy on Oct. 31 after disclosing sizable exposure to derivatives and other investments related to billions of dollars in European sovereign debt. The agriculture committee is responsible for investigating the failure of MF Global because it has jurisdiction over regulation of commodity futures broker firms, as well as farmers and ranchers who use futures trading as a hedging technique.

MF Global took customer funds and lent it to another side of the firm for proprietary trading. Now, that money appears to be gone.

When MF Global declared bankruptcy, farmers like Magnuson and Dean Tofteland, who raises pigs and grows corn and soybeans in Luverne, Minn., thought they were safe. They had been told their money was held in "segregated" accounts to be invested only in their best interest.

Unfortunately, this didn't protect Magnuson, Tofteland or thousands of farmers and ranchers nationwide from MF Global's suspect investments. Bankruptcy trustees have frozen their accounts or returned only a portion of the cash that was in them. With $200,000 in limbo, Tofteland said he can get almost no firsthand information from regulators or trustees.

"If the funds are missing, where are they?" he said. "If you don't know that, who moved them?"

The Senate hearing Thursday showed how difficult it would be to answer such questions. MF Global was allowed to invest in bonds of foreign countries and lend money from one part of the company to another. Federal regulations did not require the risky loans to be recorded on MF Global's balance sheet. Klobuchar called the rules, put in place in 2000 and 2005, "part of this Wall Street expansion where basically Wall Street gets to go down the street in their Ferraris and the government's falling behind in a Model-T Ford."

CFTC chief Gary Gensler promised the senators that the commodities commission would consider placing new limits on investments of segregated funds. He admitted that the government now relies on "self-regulation" by companies and depends on the private Chicago Mercantile Exchange to audit companies such as MF Global. In fact, an exchange audit of MF Global shortly before the bankruptcy filing found no financial problems.

SEC Chairman Mary Schapiro talked about making firms disclose more information because billions of dollars in obligations showed up in SEC filings but not on balance sheets.

This is not how rural community banker Mark Nowak understood what was supposed to happen. Nowak has been involved in agricultural lending for 45 years. He also is a farmer. He and others around tiny Freeborn, Minn., have traded commodity futures for decades to hedge risks.

"The statements we get say the funds are segregated," Nowak said. "They can be placed only for the benefit of the account holder."

Now, Nowak said, "I have friends, neighbors and customers who can't get their money back [from MF Global], and they've had to borrow money to move to other brokerage services."

Don Feddie, a South Dakota agriculture finance manager, has clients, including several Minnesotans, who are out "upwards of $100,000" from MF Global. "It's plain thievery," Feddie said.

Feddie continues to believe that MF Global illegally commingled money from his clients' margin accounts with other funds to prop up bad investments in Europe. "One thing I noticed was extraordinarily high margin calls the last several months," Feddie said. Margin calls are cash payments demanded when assets bought on credit decline in value. The broker, in this case MF Global, sets the formula.

With so much speculation and so little certainty, folks like Tofteland say they find themselves turning cynical. Told that speakers at the Senate hearing said he might get back only 66 cents on each dollar he had deposited at MF Global, he uttered two words: "Not acceptable."

"It's important to put customers ahead of creditors," Tofteland said.

Klobuchar agreed. She also believes investment rules may need to change, regardless of whether prosecutors file criminal charges.

"I don't have a scandal meter," she said. "I just think it's another example of why we just can't let these financial firms run roughshod over people on Main Street or people who are doing nothing but growing crops or raising pigs. They should not have to know every in and out of the regulatory system to protect their money."

MarketWatch contributed to this report. Jim Spencer • 202-408-2752

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