For my clients, their cash is kept separate from mine, and they receive any income earned from their cash balances.  For MF Global clients, their cash was also kept separate (although there is a report this was not the case), but MF Global received the income earned from the client cash deposit.  In other words, the clients could not receive income earned on their cash balances.

Apparently, this worked fine for MF Global as long they could invest the cash into U.S. Treasury instruments and earn a decent rate of interest.  When the Fed drove down the interest rate earned on Treasury debt, income to MF Global dropped.  With regulatory approval, they were then permitted to invest in sovereign debt of other nations, like Canada and Switzerland.  Unfortunately, I suspect MF Global invested in sovereign debt of nations like Greece and Italy, whose bonds quickly became worth less than invested.  When everything had to be sold, there was a loss of $1.2 billion, all borne by the clients.

If this is the case, it would mean MF Global and Jon Corzine were toweringly stupid or imprudent but NOT criminals.  The tragedy is that they may have followed the law, but they did not act in their client’s best interest.  This is yet another example where brokers are different from Registered Investment Advisors, who are held to a higher standard, i.e., to act in a fiduciary manner with all client funds.  Stated another way, we are required to act in the client’s best interest, not our own.  This is not true for stockbrokers!

I doubt more regulations would help, except requiring anybody holding client funds to act only in the best interest of the clients.  But, the army of stockbrokers is opposed to this!

Caveat:  This is my best guess of what happened at MF Global under Jon Corzine but is mere conjecture.