The bankruptcy of MF Global demonstrates that the 1% of crony capitalists in America are now subject to the same risks of economic losses as the other 99% of us. Led by former Goldman Sachs Chairman Jon Corzine, MF Global engaged in speculating on the bonds of Portugal, Italy, Greece, and Spain (PIGS) with shareholder money; they then tried to hedge their bets with derivatives called Credit Default Swaps (CDS). The firm relied on Corzine’s inside expectation that crony politicians in Germany and France would stick taxpayers with the cost of bailing-out bondholders, like MF Global. The bet buckled when voters rebelled and demanded bondholders suffer losses. Once subject to capitalist risks, MF Global collapsed.
Jon Corzine made most of his fortune from developing intimate relationships with politicians and government officials. As Chairman of Goldman Sachs, in 1999 he led the effort to convince the Clinton Administration and Congress to repeal the Glass-Steagall Act of 1933. The Act banned commercial banks that receive insurance from the Federal Deposit Insurance Corporation (FDIC) from engaging in speculation and trading in securities. Historians have blamed the start of the Great Depression on massive leveraged speculation by banks in the stock and bond bubbles of the “Roaring Twenties.” Many of the victims of the 1929 crash turned out to be the proverbial “widows and orphans” whose small deposits were wiped-out when trading losses forced their savings institution into bankruptcy.
Goldman Sachs had been a private-partnership for over 100 years when Corzine joined the firm as a bond trader in 1975. Consequently, the capital of partners in Goldman Sachs and the other investment banking firms were at 100% risk for trading losses by their firms. When Jon Corzine became Chairman and CEO of Goldman in 1994, he understood that stocks were legal to leverage by 100%, but U.S. government bonds could be leveraged by 5,000%. Corzine knew his older partners would never be willing to risk their own capital at very high leverage. Corzine set his sights on repeal of Glass-Steagall Act so his partners could get their money out through a public offering and the firm could take advantage of the leverage risk trading on shareholders’ money.
As a partnership, Goldman Sachs tended to contribute evenly to both political parties prior to 1994. Once Corzine became Chairman, the firm dramatically increased political donations and focused giving to Democrats as demonstrated in the charts below by OpenSecrets.org.
This effort accelerated when former senior partner of Goldman Sachs, Robert Rubin, was named Secretary of the Treasury in the Clinton Administration in January of 1995. Four years and huge political contributions later, Congress and the President signed the Gramm-Leach-Bliley Act, repealing Glass- Steagall. Corzine earned what has been estimated to be $400 million on the 1999 initial public offering of Goldman Sachs. Robert Rubin would go on to serve on the Board of Citicorp; where he received more than $126 million in cash and stock during his tenure.
Goldman Sachs dramatically ramped up risk taking in derivatives with the public’s money. In 2001 Greece gained entry into the euro, but within a year the country was violating its entry agreement by exceeding euro member debt restrictions. To mask this violation, Goldman engineered a $10 billion Greek derivatives trade based on fictional exchange rates. Goldman then secretly arranged an additional $1 billion in loan for the Greeks. Goldman was wildly profitable just before the 2008 “Credit Crisis” by leveraging 25 times its “$32 billion of equity to support $799 billion of assets”. Fortunately for Goldman, their former Chairman and current Secretary of the Treasury in 2008, Henry Paulson, gave the firm $10 billion from the Troubled Asset Recovery Program and arranged the bail-out of AIG that miraculously allowed Goldman to collect $12.9 billion in an AIG unsecured debt.
MF Global was a major international broker in the highly opaque derivatives market. The Bank for International Settlements has estimated the size of this market to be $1.14 Quadrillion. With world GDP only $62 trillion, derivatives have leveraged the earth nineteen times! The bankruptcy filing of MF Global is about to bring to light a huge number of highly embarrassing and potentially destructive transactions. From now on, there will be no bail-outs for the global 1% of crony capitalists.
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