When New Jersey governor Jon Corzine lost his reelection bid to Chris Christie in 2009, part of his defeat in a Democratic state was blamed on the post-Lehman mood. Having experience as a top executive at Goldman Sachs just didn't help. But in March 2010, Corzine returned to Wall Street where he hoped to bolster his reputation, helming broker-dealer powerhouse MF Global. On Monday, the company announced it had filed for Chapter 11 bankruptcy protection.

Although its website still boasts "MF Global is also one of 22 primary dealers authorized to trade U.S. government securities with the Federal Reserve Bank of New York," the site also published a statement acknowledging the Federal Reserve Bank of New York has just suspended that very designation. Much worse, however, are the allegations that hundreds of millions of dollars in customer accounts are missing and that these accounts have been wrongly used in an attempt to save the company.

As the New York Times reports,

Regulators are examining whether MF Global diverted some customer funds to support its own trades as the firm teetered on the brink of collapse.

The discovery that money could not be located might simply reflect sloppy internal controls at MF Global. It is still unclear where the money went. At first, as much as $950 million was believed to be missing, but as the firm sorted through its bankruptcy, that figure fell to less than $700 million by late Monday, the people briefed on the matter said. Additional funds are expected to trickle in over the coming days.

But the investigation, which is in its earliest stages, may uncover something more intentional and troubling.

[W]hat led to the unaccounted-for cash could violate a tenet of Wall Street regulation: Customers’ funds must be kept separate from company money. One of the basic duties of any brokerage firm is to keep track of customer accounts on a daily basis.

Corzine took a big gamble, notes the Times, "buying up big holdings of debt from Spain, Italy, Portugal, Belgium and Ireland at a discount. Once Europe had solved its fiscal problems, those bonds would be very profitable."

While the bonds themselves have lost little value and mature in less than a year, MF Global was seen as having taken on an enormous amount of risk with little room for error given its size. By Friday evening, MF Global was under pressure to put up more money to support its trading positions, threatening to drain the firm’s remaining cash.

Were customer accounts raided in the process and, if so, was Corzine aware of this activity? This is what the Commodity Futures Trading Commission and the FBI are trying to find out—subpoenas are already being issued.

This meltdown also brought to mind Governor Chris Christie's recollection of assuming office in Trenton as the state was left in shambles (transcription provided by the Washington Examiner):

Gov. Corzine assured me that I had a $500 million surplus in the state budget for fiscal year 2010 that was going to carry me right home to June 30 of 2010, and I'd be just fine. Well, the morning that I was sworn in as governor, we heard a rumor that Gov. Corzine was doing some stuff with the finances of the state on the way out, to give some presents, Jersey style, to some friends on the way out.

We heard that he was going to wire transfer a few hundred million dollars to some of the major cities of New Jersey so they could get the money before the Big Bad Wolf came to Trenton. And so I said to my cabinet secretary, as soon as I'm done with that oath, you get off the stage and you call the Treasury Department and tell them the new governor said, "Stop any wire transfers. No wire transfers, that's it."

...We ran it like clockwork. Twelve noon on the dot, I took the oath....The Treasury Department told us that at 10:30 that morning, an hour and a half before the oath, Gov. Corzine had wire-transferred hundreds of millions of dollars to cities in New Jersey, depleting the funds of the state even more, as his last present to me on the way out. Two days later, I found out that that $500 million surplus was actually a $2.2 billion deficit. For the five months remaining in fiscal year 2010, 65 percent of the money was already spent. That was my "Welcome to Trenton" party....

Jon Corzine—the gift that keeps on giving.

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