Same Ol' Story: Corzine Firm Proves Nothing Has Changed Since the 2008 Financial Crisis

We are one of the world’s leading brokers in markets for commodities and listed derivatives. We provide access to more than 70 exchanges globally and are a leader by volume on many of the world’s largest derivatives exchanges. We are also an active broker-dealer in markets for commodities, fixed income securities, equities, and foreign exchange. We are one of 20 primary dealers authorized to trade U.S. government securities with the Federal Reserve Bank of New York.

This quote is what investors read in MF Global’s Prospectus Supplement in August 2011. MF Global issued $325 million of 6.250% 5-yr senior notes that month. The deal was led by Investment Bank Jefferies and co-managed by Investment Banks Bofa Merrill Lynch, BMO Capital Markets, COMMERZBANK, Natixis, Lebenthal & Co., LLC, Sandler O’Neill + Partners, L.P. and US Bancorp. I provide this backdrop because you have to see that, once again, those who have a fiduciary responsibility to protect investors failed.

The banks on this deal are underwriters of securities who are obligated to perform due diligence on the issuer (MF Global) to protect investors. I have no doubt that the bankers performed their due diligence on the objective facts about the company: e.g. financial statements, management background, market share, customers, etc. But did the bankers adequately assess the character of MF Global’s management? Is it possible for a banker to protect investors from managers with impeccable credentials who are willing to take reckless risks with other people’s money?

Rating agencies, rating agencies, rating agencies. Sounds familiar huh? Moody’s, Fitch, and S&P once again did not meet their fiduciary responsibility to investors. How can a bond deal be executed in August and the company file for bankruptcy shortly thereafter? Like the bankers, the rating agencies surely did their analysis on the objective data. However, can they warn investors about reckless management?

The facts are on October 25th, Jon Corzine stated he was confident that MF Global would successfully manage its $6.3 billion exposure to European debt (Spain, Portugal, Belgium and Italy). Yet one week after a failed attempt to sell the company, MF Global filed for Chapter 11 bankruptcy on October 31st 2011.

Now let’s discuss the failure of management at MF Global. Jon Corzine, who is considered by many to be one of the smartest fixed income minds in the business, took immeasurable risk with the capital of his firm. It was revealed that the company was leveraged 40-1. In summary, the company only had 2.5% equity invested against risk positions. Note: even in the height of the sub-prime crisis, 40-1 leverage would have been considered extremely risky, where small movements in underlying positions could represent deleterious outcomes for investors.

Did the great Jon Corzine not learn from the greatest financial meltdown seen in the US economy for decades? The answer is simple; here is another example of the entrusted “gambling with other people’s money.” The irony of this is that in the August 2011 Bond deal, there is a Key Man clause that states if Mr. Corzine departed prior to July 1, 2013 as MF Global’s full time chief executive officer due to his appointment to a federal position by the President of the United States and the confirmation of that appointment by the United States Senate, investors would get an additional 1.00% coupon on their existing 6.250% bonds. I beg to differ in that the “clause” should have said if Jon Corzine decided to increase the risk taking at MF Global similar to previous risk position at Goldman Sachs, investors’ money should have been redeemed at 100 cents on the dollar. Another concern is that the company cannot currently account for $600 million of customer funds.

Again, the public trust has been breached by those who are entrusted to protect other people’s money. What is the difference between Corzine and Madoff? Corzine lost other people’s money by taking unnecessary and unapproved risks. Madoff stole other people’s money in a Ponzi scheme. What Corzine did may be technically legal, but he certainly did not have approval from his shareholders to take “bet your company” risks. Where were the regulatory and supervisory agencies in this? Where were the safeguards promised by Dodd-Frank? I am beginning to think we may have to pad our mattresses again with money; at least we would then know where it resides, and if any is missing, the house pet (cat, dog, or hamster) can provide better answers that what we hear from the Wall Street “experts” such as bankers and federal regulators.

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