Corzine Used Other People's Money - What's the Problem?

Bloomberg news reports that MF Global Holding Ltd.'s chief executive officer, Jon S. Corzine is in a LOT of hot water. An internal e-mail is evidence that that Corzine ordered $200 million from a customer account moved JP Morgan to cover an overdraft. Of course a spokesman for Corzine denies making any such order of even implying approval for such a transfer of funds. It may turn into a case of he said-she said. Nevertheless it got me to thinking about the nature of our banking system.

A revealing part of the article includes a fascinating bit of information:

Barry Zubrow, JPMorgan’s chief risk officer, called Corzine to seek assurances that the funds belonged to MF Global and not customers. JPMorgan drafted a letter to be signed by O’Brien to ensure that MF Global was complying with rules requiring customers’ collateral to be segregated. The letter was not returned to JPMorgan, the memo said.

Now what I find fascinating is the idea that money deposited by customers in an investment account is still considered their own and not an asset of MF Global. It seems to me that is exactly the right way to look at it. The money deposited at MF Global by customers in their accounts remain the property of the customers. The firm should not be able to tap into that fund to finance whatever they want to finance.

Interestingly while that same common-sense reasoning should apply to the commercial banking system in general, unfortunately it does not. Alas, in our current fractional-reserve banking system, customer demand deposits become assets of the bank that they can use as they see fit. What is good for MF Global should be good for you neighborhood depository institution. Deposits by customers should be considered property of the customers and not assets owned by the bank. Banks should not be able to use those funds that are payable on demand to finance loans or other investments they want to make. Jon Corzine is in some serious legal trouble and may be found guilty of monetary malfeasance. Every day commercial bankers in our fractional-reserve banking system do the same thing Corzine is alleged to have approved. The only difference is that it is legal for commercial bankers to do so.