MF Global: The Untold Story of the Biggest Wall Street Collapse Since Lehman
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Only on Wall Street can you bankrupt a company; misplace $1.6 billion of customers’ money; lose 75 percent of shareholders’ money in two weeks; speed dial a high priced criminal attorney and get a court to authorize the payment of your multi-million dollar legal tab from the failed company’s insurance policies; have regulators waive your requirements to take licensing exams required to work in the securities and commodities industry; have your Board of Directors waive your loyalty to the firm; run a bucket shop out of the UK; and still have the word “Honorable” affixed to your name in a Congressional investigations hearing.
This is not a flashback to the rotting financial carcasses of 2008. This putrid saga has been playing out in five Congressional hearings since December with the next episode scheduled for Tuesday, April 24, before the Senate Banking Committee under the auspicious title: “The Collapse of MF Global: Lessons Learned and Policy Implications.” (The title might more appropriately be, “MF Global: Lessons Never Learned and Policy Implications of a Wild West Financial System Just One TradeAway from the Next Taxpayer Bailout.”)
There are plenty of lessons to be learned from MF Global and heart-pounding policy implications; all of which we can count on Congress to ignore at the behest of the Wall Street money and lobby machine until the next epic financial crisis – an eventuality that is growing more likely each day as Congress refuses to restore the Glass-Steagall Act, the depression era legislation that bars Wall Street securities firms from owning banks holding insured deposits.
MF Global, the eighth largest bankruptcy in U.S. history, held 36,000 customer accounts in the U.S., over 5,000 in the U.K., and an unknown number in Japan, Australia, and Hong Kong. It’s a forensic accounting mess. Can you imagine what it would be like if one of the major Wall Street firms failed with more than 3 million customer accounts?
MF Global filed for Chapter 11 bankruptcy in the U.S. on October 31, 2011 because of off balance sheet transactions and proprietary trading – a quaint name for betting the house with other people’s money – resulting in a downgrade of their credit rating to junk and a resulting collapse in liquidity.
In MF Global’s unique world of risk controls, the CEO of the firm was doing the proprietary trading. Off balance sheet transactions blew up Citigroup in 2008, requiring hundreds of billions in taxpayer funds and guarantees to shore it up. Proprietary trading, of the heads we win, tails you lose kind, has cost Goldman Sachs and Citigroup serious reputational damage with customers. And yet, no lessons have been learned. Off balance sheet bombs are still lurking all over Wall Street and the SEC continues to stall on outlawing proprietary trading at securities firms holding customer accounts.
The CEO of MF Global when it disintegrated was Jon Corzine, the former New Jersey Senator and Governor and former co-head of Goldman Sachs & Co. Corzine took the reins of MF Global in March 2010. Conflicts abounded with the knowledge and rubber stamp of the Board of Directors. Corzine was not just Chairman and CEO, he was the firm’s top trader of volatile European BIIPS debt – Belgium, Italy, Ireland, Portugal and Spain. Corzine took the firm’s position from approximately $500 million when he was hired to $8.1 billion (including Greece and France) in the 19 months it took him to blow up the firm. (How does the CEO of a financial firm police a cowboy trader when he’s the same individual?) When the Chief Risk Officer of the firm, Michael Roseman, raised warnings about the risk with the Board of Directors, Rosemanwas asked to leave and replaced with a new Chief Risk Officer acceptable to Corzine, according to Congressional testimony given by Roseman and Corzine.
But wearing the three incompatible hats was not the only fatal flaw in Corzine’s management model: he contractually did not owe his total loyalty to MF Global. The August 11, 2011 proxy issued to shareholders and filed with the SEC carried this caveat:
“During the term of Mr. Corzine’s employment agreement with the Company, Mr. Corzine will spend substantially all of his business time and attention on Company matters, except that he may serve as an operating partner of J.C. Flowers. Pursuant to his contract with J.C. Flowers, Mr. Corzine will not receive any salary from J.C. Flowers as long as he is serving as Chief Executive Officer of the Company, but he will have a financial interest as a limited partner in certain of J.C. Flowers’s investment management entities. Mr. Corzine’s employment agreement with the Company contains a provision regarding corporate opportunities. In general, this provision provides that, if Mr. Corzine acquires knowledge from J.C. Flowers (and not the Company) of a potential transaction or other business opportunity that may be a business opportunity for the Company he will have no duty to communicate or present such opportunity to the Company…”