The House Agriculture Committee again tackled the origins of the MF Global collapse on Feb. 29, questioned the role of speculators in driving up the cost of gasoline and worried about the cost of implementing the new Dodd-Frank legislation that governs Wall Street transactions.

For more on Dodd-Frank, see here.

In opening remarks, Oklahoma Rep. Frank Lucas, chairman of the committee, said that “thousands of customers have yet to receive nearly 30 percent of the funds that MF Global should have held in segregated accounts. … Farmers and ranchers across the country continue to face hardships because of their missing funds, and have lost confidence in the futures system.”

For more MF Global coverage, see here.

Minnesota Rep. Collin Peterson, ranking member, said the CFTC “is still in the process of investigating what happened … and monitoring our futures markets as we watch energy prices continue to climb.”

That wouldn’t be the last time the rising price of gasoline was brought up.

The focus then shifted to the hearing’s sole hot-seat occupant, Gary Gensler, head of the CFTC.

For Gensler’s prepared remarks, see here.

An exchange late in the hearing may help illuminate why MF Global investigators are having a difficult time unwinding exactly what happened to customer funds. Recent reports suggest the chances for criminal prosecutions for executive’s actions at the firm – once considered highly likely – are slipping.  

Kansas Rep. Tim Huelskamp pointed out Gensler -- who has recused himself from the MF Global investigation due to long-time connections to disgraced brokerage head Jon Corzine – had missed the committee’s hearing on the firm last November. “You’ve said one of your main priorities is enhancing customer funds. … Given that 99 percent of MF Global’s accounts were commodity accounts regulated by (the CFTC) do you think the bankruptcy was structured” under the Securities Investor Protection Act (SIPA) “thereby stripping customers of their priority status?”

Futures commission merchants under CFTC “jurisdiction and regulation are also broker/dealers under the Securities and ExchangeCommission,” replied Gensler, who spoke haltingly throughout the proceedings. “The good news is … everything in the bankruptcy code to protect futures customers … they must use the same provisions...”

Huelskamp cut Gensler off with “but customers with segregated funds that were lost did lose their priority status, correct?”

Gensler, unsure, turned to CFTC Commissioner Jill Sommers. “In the SIPA proceeding for MF Global, commodity customers have an exclusive right to the customer property in the segregated accounts,” said Sommers. “They did not lose their priority status in that particular bankruptcy case.”

Huelskamp pressed on, asking about the early days of the MF Global collapse. “It was obvious by (Oct. 31) that customer funds were missing and likely comingled. Why didn’t the (CFTC) move immediately to freeze the assets of the (brokerage) with that knowledge in hand?”

Like MF Global executives’ congressional testimony in recent months, Gensler’s memory of the bankruptcy’s precipitating events was extremely foggy. “I’ll try to answer just what I know about that weekend. I think that was before I wasn’t participating. From that weekend, the company had filed that they were in compliance (with trade rules) each day. That weekend, most of Sunday, (MF Global) was working to move the customer positions to another company, Interactive Brokers.

“There was a series of conference calls on (Oct. 30) to help facilitate the movement of that. It’s been widely reported that somewhere around 2:30 in the morning I was woken up and (was) told ‘nope, that’s not the case.’ A few hours later, the protections of SIPA and the bankruptcy court were put in place.”

Huelskamp: “So, you had no knowledge – or no one at the (CFTC) had knowledge – before that that comingling of funds was occurring?”

“I can only speak to what I know of,” replied Gensler, who was reminded by Huelskamp that he was referencing events that occurred 10 days prior to his recusal.

Was Gensler told the customer “funds were comingled” during the early-morning phone call?

Gensler, fumbling for words, said “To be more precise, I was told there was missed – no, that the account was…I don’t actually remember the words.”

Despite not remembering the exact information imparted, Gensler was positive that the “word (Huelskamp) used wasn’t used.” That word, presumably, is “comingled.”

Despite the continuing tap-dance, Huelskamp was undeterred. “So, tell me what word was used. We’re talking about billions of dollars for farmers and ranchers that had just been lost.”

“Absolutely,” said Gensler. “I recall being woken up and being informed, with a lot of people on the phone call – international regulators, the SEC and so forth – that … the deal with Interactive was off and the customer funds account wasn’t whole.”

Huelskamp: “There were customer funds that were missing. That’s what you were told?”
Gensler’s memory remained cloudy -- “I don’t recall the exact words, sir” – and Huelskamp then asked him to provide, in writing, “what you were told.”

Still, the CFTC head remained reticent. “I want to work with this committee but also not prejudice an ongoing investigation of the career (CFTC) staff and so forth…”

“So, you won’t tell us what you were told?” asked Huelskamp.

“I want to work with this committee,” said Gensler. “But it’s also what was told to any representative of the CFTC over that weekend. I was a representative of the CFTC and it’s a matter of an investigation, as well.”

“Are you personally being investigated?” asked the congressman.

No, said Gensler.

“So, I’ll ask you to tell us – in writing if necessary – what exactly you were told at that time.”

Gensler refused to be boxed in and responded with a non-sequitur: “Just working with the committee and the Division of Enforcement.”

Huelskamp was perplexed. “I don’t care about the Division of Enforcement. This is a request from myself, as a member of this committee. I’m not asking about the division. I’d just like to know what you – and, apparently, dozens of other folks – were told.”

Speculation and gas prices

Gensler was barely given a chance to catch his breath before the causes of rising gasoline prices were broached. A few days prior to the hearing, California Rep. Dennis Cardoza said he’d spent nearly $70 for a fill-up back home. “They’re talking about the potential for (prices to reach) $4 per gallon. They’ve exceeded $4 in California. … We know from the Energy Information Administration that the supply of oil and gas is higher today than it was three years ago when (gas prices) were at a low of $2 per gallon.

“We know it’s a worldwide market, of course. But right now the demand for oil in the United States is the lowest since 1997…

“Do you agree that something more basic than supply and demand is driving these prices?”

Gensler: “Today’s markets are made up of hedgers and speculators…”

“Aha!” exclaimed Cardoza.

“At any given both are a part of the market,” Gensler continued. “I’ve mentioned earlier that the futures market, over 80 percent of the market, is swap dealers, hedge funds, managed money.”

“So speculation is having some impact,” said Cardoza. “You just can’t quantify it.”

Gensler replied that on “any given day, financial actors – you’ve referred to them as ‘speculators’ – are part of the pricing of energy and agricultural products. Our role is to ensure that market is free of manipulation, that it’s transparent and it reflects supply and demand.”

Cardoza said “the fact is that … the CFTC, with other authorities, (is addressing) the extensive energy speculation. Care to comment on what specific efforts you’re taking under the new Dodd-Frank rule?”

Gensler: “Just that it’s the broad rule, it’s anti-manipulation authority, it’s transparency authorities. Once the data is in, it’s position limit authority.”