Jon Corzine told the House Agriculture Committee, “I simply do not know where the money is, or why the accounts have not been reconciled to date.” The public is outraged that the former CEO of bankrupt global financial-derivatives broker and prime dealer in US Treasury securities MF Global doesn’t know where the missing $1.2 billion in client funds went.
Corzine is the member a few exclusive clubs: he is a Goldman Sachs alum, former US senator, and former New Jersey governor. After the incumbent Corzine was beat by Chris Christie in the 2009 New Jersey gubernatorial race, the MF board probably rejoiced, believing the guy to fix their problems was suddenly available. Now he’s in the club of taking a mere 20 months to create the eighth largest bankruptcy in history.
As a stand-alone entity, MF Global was born in 2007 when it was spun off from UK hedge-fund giant, Man Group. MF booked revenues of $4 billion that year from interest earned by using its customers’ funds, an operation that sounds like fractionized banking: short-term embezzlement used to make profits.
For banks, the practice was sealed in English common law in 1811 in the court case of Carr vs. Carr, where Master of the Rolls Sir William Grant ruled that debts mentioned in a will included bank accounts since the money had been deposited into the bank and wasn’t earmarked in a sealed bag. The deposit was thus a loan rather than a bailment.
The same Judge Grant ruled the same way five years later in Devaynes vs. Noble, despite an attorney’s argument that “a banker is rather a bailee of his customer’s funds than his debtor … because the money in … [his] hands is rather a deposit than a debt, and may therefore be instantly demanded and taken up.”
In 1848, in Foley vs. Hill and Others, Lord Cottenham ruled,
Money, when paid into a bank, ceases altogether to be the money of the principal; it is then the money of the banker, who is bound to an equivalent by paying a similar sum to that deposited with him when he is asked for it.… The money placed in the custody of a banker to do with it as he pleases.
CONTINUED at the Ludwig von Mises Institute. Written by Doug French.