In the end, Jon Corzine was little more than an unsupervised rogue trader.
His disproportionately reckless $6.3 billion bet on the credit quality of a few European nations bankrupted MF Global Holdings Ltd. over the course of three dramatic days after the short-term credit markets quickly lost confidence in him and his firm. His gamble will cost MF’s shareholders and creditors billions of dollars and, virtually overnight, put the careers of MF’s almost 3,000 employees in jeopardy.
MF Global now has the distinction of being one of the largest bankruptcies in American corporate history, with almost $40 billion in liabilities. There is also the matter of the hundreds of millions of dollars of customers’ money that regulators have reported to be missing from the firm’s coffers.
In any case, it’s incredible how little Corzine and his associates learned from the collapses of Bear Stearns Cos., Merrill Lynch, Lehman Brothers Holdings Inc. and American International Group Inc. three years ago. And it now seems very hard to believe that just a few months ago Corzine was considered the front-runner to be the next U.S. Treasury secretary.
It didn’t have to be this way. The tragic element of Corzine’s MF Global is that Monday’s bankruptcy filing could have easily been avoided if Corzine’s ego and ambition had been held in check by someone -- anyone -- willing to stand up to the former New Jersey governor, senator and senior partner at Goldman Sachs Group Inc.
No One Watching
Where, for example, was J. Christopher Flowers, the billionaire founder of J.C. Flowers & Co.? According to MF Global’s most recent proxy statement, Flowers’s firm owned 6.8 percent of MF. But then Flowers had reasons to have blind faith in Corzine: It was Flowers who recruited the former governor to MF in 2010, and also made Corzine a partner in his private-equity fund. When the two men were at Goldman Sachs in the 1990s, they had a symbiotic relationship: As Flowers was head of the financial-institutions group, Corzine relied on him to make introductions to other Wall Street bosses so they could ponder strategic deals.
Where were MF Global’s other institutional shareholders, such as Fidelity Investments (which held a 14.8 percent stake, according to the proxy), Guardian Life Insurance Co. (7.4 percent), TIAA-CREF Investment Management LLC (6.6 percent) and Piper Jaffray Cos. (6.3 percent)? Were they too dazzled by Corzine’s resume to take a serious look at how he intended to transform MF Global from a backwater to a major player on Wall Street? Where was MF Global’s auditor, PriceWaterhouseCoopers LLP, which managed to pocket almost $25 million in fees from the company over the past two years?
And where, for heaven’s sake, was MF Global’s eight-member board of directors -- a ragtag collection of mostly unknown Wall Street types who had the fiduciary responsibility on behalf of creditors, shareholders, counterparties and employees to make sure Corzine wasn’t taking irresponsible risks? Is it too much to ask a board of directors to take this responsibility seriously? Apparently it was at MF Global.
In granting Corzine a three-year extension of his employment agreement in 2011, the board’s compensation committee noted that his “performance has been exemplary since joining the firm just over one year ago,” according to the proxy statement. The board also noted that Corzine “accomplished key near-term building blocks, including significant improvements in the reputation of the firm as demonstrated by its ability to hire quality professionals, the company’s success in securing primary dealer status, its growing client balances and its improved posture with regulators.” One wonders if the board members still hold that opinion.
Other People’s Money
The collapse of MF Global points once again, in the strongest possible terms, to the importance of having a substantive, teeth-bearing regulatory regime charged with overseeing the kind of asynchronous risk-taking that gives people like Corzine the incentive to gamble with other people’s money in hopes of reaping financial windfalls. And yet, more than three years after the collapse of Lehman Brothers and the onset of the financial crisis, we don’t have in place anything close to necessary regulations to try to prevent companies like MF Global from exploding.
There is little question that from the outset of his tenure at MF Global, Corzine was swinging for the fences. He told me at the time that he saw MF Global as sleepy and risk-averse; he was determined to ratchet up exponentially the amount of risk the firm took using its creditors and shareholder money. Corzine himself had only a tiny fraction of his fortune invested in MF Global. His option-oriented compensation package encouraged him to take outsize risks in order to move MF Global’s stock price into “in-the-money” territory.
One also suspects that Corzine was looking for some serious redemption after the January 1999 coup he suffered at the hands of his fellow Goldman Sachs partners. Even though Corzine hadn’t sat on a trading desk in years, MF Global was his return ticket to the land of the Wall Street giants.
Corzine has always been a bit precocious and underestimated. In 1980, at the age of 33, he became a Goldman Sachs partner after just 4½ years at the firm. In 1986, he turned a wrong-way bet by Goldman Sachs on the direction of interest rates and Treasury securities -- a bet that looked like it was going to cost the firm $150 million -- into a $10 million gain after he personally took charge of the trade and worked it out. Many of his Goldman Sachs partners saw him as a bit of a hero afterwards, and the slope of his career trajectory angled dramatically upward.
In 1993, his future leadership of the firm was virtually assured after his trading group racked up impressive gains on the direction of various currencies against the dollar, helping Goldman Sachs to achieve record pretax earnings of $2.7 billion.
A Golden Boy
Corzine was the firm’s golden boy. But just after those earnings were paid out as partner bonuses, the trading environment in 1994 turned decidedly sour. In that year, the firm started losing almost $150 million every month and Corzine refused to give up on his trades --another wrong-headed bet on interest rates. In the end, the firm barely broke even in 1994, and some 40 partners left the company as they watched their capital accounts dwindle. Somehow, Corzine wasn’t held accountable.
In September 1994, despite the huge trading losses for which his fixed-income group was responsible, Corzine’s partners selected him to be the firm’s new senior partner. In 1995, the year after the worst annual performance in Goldman Sachs’s history, he exhorted his partners to try to make $10 billion in pretax income during the next five years. After first snickering at this goal, his partners accomplished it -- and more -- making the firm’s May 1999 initial public offering both inevitable and a huge success. By then, though, Corzine’s unilateral efforts to merge Goldman Sachs with a variety of other Wall Street titans - - from Salomon Brothers to JPMorgan to Mellon Bank -- had so alienated his partners that they colluded to oust him. He said he never saw it coming.
While the denouement of MF Global is still being written, one thing is crystalline: Behind Jon Corzine’s bearded, avuncular facade lies the soul of a stubborn, ambitious and aggressive risk-taking trader who in the end drove MF Global into the financial abyss. If only someone had had the guts to stop him.
(William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.)
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