Tuesday, November 6, 2012

“Jon Corzine Redux”

Sydney M. Williams
Thought of the Day
"Jon Corzine Redux"

November 6, 2102

Crony capitalism is a reason why Main Street does not trust Wall Street, or Washington. Aggravating that attitude, it now appears that the Justice Department will not file criminal charges against any executives including the former CEO of MF Global, despite the misappropriation of customer funds. The man at the center of this storm, Jon Corzine, was one of Mr. Obama’s principal bundlers, hosting a $35,000 a plate dinner last year at his New York City townhouse for the President’s re-election.

At the time of its bankruptcy, MF Global had a balance sheet of $40 billion, with $16 billion in off-balance sheet liabilities. The whole was supported by $1.6 billion in equity, providing a leverage ratio of 40:1 – “not a lot of room for errors,” as Richard Finger noted recently in Forbes.

A year ago last Wednesday, Mr. Corzine walked out of MF Global’s offices at 717 Fifth Avenue after leading his firm into what amounted to the eighth largest bankruptcy in U.S. history. It wasn’t bad markets, or a rogue trader that caused the collapse. The firm had “borrowed” $1.6 billion in customer moneys to fund losing trades on European sovereign debt.

The trades that brought the firm down were the purchases of just over $6 billion in Southern European short-dated (Two-year) sovereign debt. The premise was that no European country in recent times had defaulted on its debt, and the spirit of European ministers was to preserve the Euro at all cost. The purchases were financed through repurchase agreements, with rates set daily, generally off LIBOR. (Global quantitative easing, with central bankers acting in concert, made possible these speculative trades.) However, two things happened. Prices of the bonds fell, requiring more margin. Secondly, poor operating results at MF Global caused a down-grade in the firm’s credit rating, which also meant the firm had to ante up additional margin – cash they did not have. So funds belonging to their 25,000 customers were tapped. Honor bowed to expediency.

Patrick Fitzgerald, writing in the Wall Street Journal, on October 24th, quoted Mr. Corzine’s lawyers as claiming that law suits against their client were a “jumble of assertions and accusations” that made “no sense” because he had “no motive.” They cite the fact that Mr. Corzine owned 441,960 shares of MF Global stock and that two months earlier he had bought an additional 50,000 shares on the open market. Of course, in August no one thought the firm would become insolvent, though the share price had dropped substantially from the start of the year, so Mr. Corzine probably thought he was getting a bargain. At roughly $4 a share, the purchase was not going to make a big dent in his wallet. While ego is not a legal term, anyone who knows Wall Street realized it played a role in terms of motive.

Jon Corzine had had a storied career. He had risen through the ranks to become co-CEO of Goldman Sachs in the mid 1990s. At Goldman he became the chief advocate for taking the firm public, an event that occurred in May 1999. Corzine then lost leadership of the firm in a power struggle to his co-CEO Henry Paulson and was forced out in late 1999. So, Mr. Corzine took a significant hunk of his new wealth (estimated at $400 million) and funded his candidacy as Democratic contender for the U.S. Senate from New Jersey; a seat he won in 2000. Six years later he won the governorship of his state, again after spending millions of his own money. He lost a bid for re-election to Chris Christy in 2010; so took the helm of MF Global. However, Mr. Corzine had remained close to the Democratic leadership. He was being touted as a possible replacement for Timothy Geithner in an Obama second term. If he had been offered the job, he would have become the third ex-Goldman partner to have served as Treasury Secretary in fifteen years – an example of the concern regarding cronyism between Wall Street and Washington.

Needless to say, that won’t happen. A year and a half after taking the helm, MF Global filed for bankruptcy, having defrauded their customers and costing 2870 employees their jobs.

Seemingly oblivious to the travails of his former employees and his customers, but ever-mindful of his own reputation, Mr. Corzine has been trying to clear his name. According to the New York Times he is “currently trading his family’s wealth.” The Wall Street Journal notes that early last year “he was an election monitor in Nigeria,” and that he had “relaxed in France, where he and his wife have a pied-à-terre, and has spent time golfing with friends on Long Island.” Interestingly, and perhaps of no significance, is that the law firm MF Global employed was the firm of Covington and Burling, Eric Holder’s former firm.

In the meantime, Mr. Corzine is reported to be restless and frustrated and, according to the Wall Street Journal, “kicking around the idea of managing money…” The latter seems unlikely, given his record at MF Global, but, as P.T. Barnum allegedly once said: “There’s a sucker born every minute;” so perhaps he will have no trouble raising money.

In a “see-no-evil, hear-no-evil, speak-no-evil” defense, Mr. Corzine has professed innocence, insisting he did nothing wrong, never mind the fact that he had risen through the ranks at Goldman because of his trading abilities. My experience on Wall Street suggests that hubris and a need to micromanage are characterizations common to most successful traders. It is hard for me to believe that Mr. Corzine was unaware of the depth of the funding problem, and of the unconventional steps to resolve it. According to an August 15th article in the New York Times, criminal investigators “are determining that ‘chaos’ and ‘porous risk controls’ at the firm, rather than fraud, allowed the money to disappear.” It’s good to have friends in high places!

It strikes me as peculiar that the Obama Administration, which professes to stand for the “little” guy, the forgotten people, middle income earners and minorities, has a worse record than George W. Bush when it comes to jailing financial miscreants. The 2008 credit collapse caused a lot of damage, yet not one person from a major financial firm has gone to jail on his watch.

There may be, though, a silver lining to this otherwise ominous cloud. Proprietary trading desks may be losing not only their cachet but their very existence. For most of three decades the lure of Wall Street riches attracted many of the best and the brightest. Math and engineering graduate students, who might conceivably have created new products such as hydrogen units allowing residences to store electricity so they wouldn’t lose it in a storm like Sandy, found themselves creating algorithms for the sole purpose of making money for their firms’ proprietary trading desks. In the scheme of things, it was an enormous drain of productive talent. The Golconda that once was Wall Street has become tarnished. Many hedge funds have shuttered. Proprietary desks are being downsized or eliminated. Wall Street will always attract those who want to seek their fortunes by matching wits with one another and searching for the lodestone that will make their fortune, but thousands of young engineers, math majors and scientists who might once have sought their fortune by playing with magic formulas may now be drawn to the idea of creating real products that will help improve all of our life styles.

I am not saying that will happen, but it might. In the meantime, Mr. Corzine goes free.

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