Jon Corzine resigns as MF Global scandal deepens

MF Global (MF) CEO Jon Corzine 

is out at the bankrupt brokerage firm, federal regulators are wimpsand panic is loose on Wall Street. Here are five things we're learning from the emerging scandal:

1. Corzine is in hot water

The executive's abrupt resignation today less than a week after MF Global filed for Chapter 11 protection suggests the situation may get ugly for the former New Jersey governor. If it turns out he ignored legal advice not to mix customer funds with the firm's money -- a major no-no for investment firms -- he could even face a criminal indictment. So with more than $600 million still unaccounted for at MF Global, it's no surprise Corzine has hired a prominent white-collar criminal defense attorney.

Said the executive in announcing his departure:

"I feel great sadness for what has transpired at MF Global and the impact it has had on the firm's clients, employees and many others."

Corzine is apparently sad enough to forgo a $9 million severance. Wise move. Taking the money after driving MF Global into the ground would not play well in a courtroom. 

Jon Corzine Resigns from MF Global (video)
Jon Corzine: How MF Global Came Up "Snake Eyes" Under His Watch
FBI to Probe MF Global's Use of Client Money

2. Corzine played fast and loose with the facts just before MF Global went bust

As late as Oct. 25, the MF Global chief told investors that the firm was taking steps to reduce its market exposure. Not so, says David Weidner in the WSJ, noting that the company was in fact "loading up" on risk at the time. 

That makes Corzine either dumb, which everyone knows he isn't, or something far more unsavory. At the very least, his reassurances about MF Global's financial position, including claims that the company was "focused on preserving capital and liquidity," will have class-action lawyers salivating.

3. MF Global engaged in creative accounting

The firm may have been masking its financial condition by temporarily reducing how much debt it showed on its books shortly before filing quarterly statements. Reports the WSJ:

"The activity, referred to in the financial industry as "window dressing," suggests that the troubled financial firm was shouldering more risk and using more borrowed funds to facilitate its trading than investors could easily detect from the firm's regulatory filings."

This practice is not only legal, but also common among U.S. corporations, especially large financial firms. It shouldn't be. "Window dressing" is a euphemism for misrepresenting. For at least two years, MF Global appears to have been reducing its borrowings on its balance sheet toward the end of a quarterly reporting period. After presenting its numbers to shareholders, MF Global's debt would increase.

Why? It's hard to say for sure, but it seems likely the firm was borrowing heavily to boost trading profits. Even by Wall Street standards, MF Global was severely overleveraged. That contributed to the company's swift downfall when its bets on European sovereign debt soured. 

4. Financial regulators blew another one

The SEC was examining how MF Global managed its debt as early as March, according to the WSJ. Securities watchdogs specifically asked the firm to explain the repeated dip in its borrowings around reporting time. MF Global provided some information, but evidently not enough to sound the alarm at the SEC.

Equally disturbing, under pressure from financial firms, the Commodity Futures Trading Commission earlier this year dropped a proposed rule aimed at restricting brokerage firms like MF Global from using customer money for trading purposes. Corzine himself lobbied the agency to abandon efforts to tighten regulations on brokerage firms, which face looser restrictions than banks.

Economist and CBSMoneyWatch contributor Mark Thoma sums up in two words why the CFTC seems to have buckled to industry pressure: "regulatory capture."

5. Fear of "contagion" is in the air

MF Global's sudden collapse as a result of betting the farm on European government debt has investors on edge about what U.S. financial firms might be next. Shares of Jefferies (JEF) plunged as much as 20 percent Thursday on fears that the investment bank also might be dangerously exposed to the crisis in Europe. 

In response to the turmoil, Jefferies issued a statement yesterday saying that as of August 31 the company had "no meaningful net exposure to European sovereign debt." Not quite. The bank has $2.68 billion in "long" investments -- bets that its European sovereign-debt holdings would rise in value -- and $2.54 billion in "short" bets. That still leaves a nearly $140 million gap in Jefferies's hedge. That may not be "meaningful," as the bank would have it, but it is material.

Still, at least some market observers, including noted equity analyst Meredith Whitney, say Jefferies is better managed than MF Global and that the bank is financially stable. That may have stopped the bleeding at Jefferies, whose shares have largely recovered, but it will only stoke fears that other financial firms are at risk.