Blog post by William D. Cohan, Nov 25, 2012
Perhaps we should no longer be surprised by the arrogance of Wall Street executives. Still, the level of hubris and bullying displayed by Jon Corzine during his 19-month tenure as chairman and chief executive officer of MF Global Holdings Ltd. (MFGLQ) -- as described in a recent congressional report about the company’s 2011 collapse -- stands out for sheer offensiveness.
The 97-page report prepared by the staff for Republicans on the House Financial Services Committee panel on oversight and investigation pulls no punches when it comes to blaming Corzine for the MF Global disaster, which wiped out thousands of jobs and billions of dollars of customers’ and creditors’ money. “Jon Corzine caused MF Global’s bankruptcy and put customer funds at risk,” the report concludes flatly.
And the gory details strewn throughout the elegantly written report -- some revealed for the first time -- show the full extent to which Corzine was out of control. In May 2010, two months after he was hired, Corzine, the former senior partner of Goldman Sachs Group Inc. (GS) and former governor and U.S. senator from New Jersey, began his pattern of deception.
“The goal here is not to be a prop trader,” the report claims Corzine said. “I don’t think that we will be in a risk taking position, substantial enough to have it be the kind of thing that the rating agencies would say ‘holy cow, these guys got a different business strategy’ than what we told them we had.”
New Division
A month later, though, Corzine had set up a new division at MF Global, the Principal Strategies Group, to make big wagers with the firm’s capital, the very thing he said MF Global would not do. He fired a bunch of the firm’s traders who he thought were not capable of swinging for the fences and brought in a slew of new hires, many from Goldman Sachs, to get the job done. He also had his very own proprietary-trading account at MF Global, even though company policy required that a more senior executive always sign off on personal trading -- an impossibility in his case because he was the most senior executive. (Corzine got around that requirement by creating a subcommittee of the board of directors to oversee his personal trades.)
By late summer, the proprietary traders and Corzine had identified a potentially lucrative trade in the sovereign debt of European nations -- among them, Ireland, Italy, Portugal and Spain -- that was trading at a discount and that Corzine thought would eventually trade at par once it matured in a year or two. He was betting that the European Financial Stability Facility, created by the euro area following decisions taken by the European Union in May 2010, would make sure the sovereign debt didn’t default.
As the size of Corzine’s bet reached about $2 billion in September 2010, Michael Roseman, the company’s chief risk officer, began to raise questions. (At the time, Roseman reported to the board of directors, not to the CEO.) Roseman told Corzine of his growing concern, and Corzine suggested they bring up the matter at the next board meeting. But Corzine soon stuffed Roseman, and at that meeting he persuaded the board to let him increase the bet to $4 billion.
“The same month, Corzine retained a search firm to find a new chief risk officer for the company,” according to the House report.
By October, as the size of the trade reached the new $4 billion limit, Roseman repeated his concern to Corzine. Again, Corzine appealed to the board -- at its November meeting -- to allow him to increase the bet. The board complied, boosting the limit to $4.75 billion. That same month, Corzine told Roseman he would no longer report to the board, but to Brad Abelow, MF Global’s chief operating officer and a longtime Corzine crony. In January 2011, Corzine fired Roseman.
Corzine’s Bet
Corzine made sure the new chief risk officer, Michael Stockman, would also report to Abelow, not the board. At the end of February 2011, Stockman met with board member Martin Glynn, a former executive at HSBC Holdings Plc, who warned Stockman he would face “tremendous pressure” to approve higher risk limits “in non core areas to support earnings weaknesses elsewhere.” By March, with Stockman’s support, the board increased Corzine’s bet limit to $5.8 billion.
Yet Corzine was still not content. In early June, he asked the board to increase the transaction limit to $8.4 billion. When the board asked him to leave the room, the offended Corzine told Stockman that if the board didn’t think he was “the right guy,” it should find someone else to be CEO. The board raised Corzine’s limit to $8.5 billion. But Stockman was now getting increasingly concerned about the size of the position.
By August 2011, Corzine had bet $7.4 billion on European sovereign debt. At an Aug. 11 board meeting, Stockman told the board the company “could need” an additional $246 million to $930 million to meet margin calls if the value of the underlying European sovereign debt continued to fall. At the meeting, Corzine and the board rejected as “too costly” the idea of hedging MF Global’s exposure to Corzine’s bet. The board also asked Stockman to create a “break the glass” contingency plan in case the ratings companies downgraded MF Global as the size of the bet became known.
In the survival plan, Stockman predicted MF Global would have sufficient liquidity to survive “one month under a severe stress event.” On Oct. 24, Moody’s Investors Service downgraded MF Global and cited -- for the first time -- the company’s outsized “exposure to European sovereign debt.” But Stockman was wrong: Despite some last-minute juggling with $1 billion of supposedly segregated customer money to pay off creditors, MF Global filed for bankruptcy a week later and was liquidated.
Tepid Law
The report makes a number of tepid recommendations about how to prevent a recurrence of what Corzine wrought at MF Global. Among them is encouraging Congress to enact a law “to restore investor confidence in the futures markets” that imposes civil liability on the officers and directors who sign a company’s financial statements or “authorize specific transfers from customer segregated accounts for regulatory shortfalls of segregated customer funds.”
Unfortunately, civil penalties have done little to deter bad behavior on Wall Street. The report lamely sidesteps the issue of criminal liability in the MF Global debacle, and the New York Times reported that “federal investigators do not expect to file criminal charges against top executives.”
To anyone who has read the House report, this is a head- scratcher. It states that Corzine made several “fateful” decisions that led to MF Global’s bankruptcy and liquidation, causing billions of dollars in losses for customers, creditors and shareholders. In those “hectic final days,” the report notes, “the company repeatedly transferred funds into and out of segregated accounts, amplifying the risk that it would miscalculate account balances for regulatory purposes.” What’s more, “these risks were compounded by the atmosphere that Corzine created at MF Global, in which no one could challenge his decisions.”
A chronology of MF Global’s death throes prepared by CME Group Inc., the parent company of the Chicago Mercantile Exchange, states that at least one MF Global employee believed “Corzine knew about loans made from customer segregated accounts.”
I’m no prosecutor, but this reluctance to hold Corzine criminally responsible for what happened at MF Global seems like a crime in itself.
William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase.
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