Regulators Investigate MF Global for Missing Customer Money; MF Global Goes Bankrupt Before Making 1st Interest Payment; Corzine's Achievement Sheet

Today I Congratulate Jon Corzine, CEO of MF Global, for an unheard of combination of rare "achievements".

Corzine's Achievement Sheet

  • After being forced out as CEO of Goldman Sachs, Corzine spent a record $62 million of his own money on a US Senate campaign and won. The prior record was $28 million.
  • During the senate campaign, Corzine refused to release his income tax return records citing a confidentiality agreement with Goldman Sachs.
  • In 2000, Corzine denied having paid off African-American ministers, when in fact the foundation controlled by him and his wife had paid one influential black church $25,000.
  • While Senator, Corzine decided he would rather be governor of New Jersey and spent $38 million buying the governorship.
  • As governor, Corzine spent some $200,000 of his own money on advertisements to promote a referendum on the 2007 New Jersey ballot to borrow $450 million to fund stem cell research. The referendum was rejected although $270 million had previously been approved to build stem cell research centers.
  • Corzine, in attempting to pass the 2007 fiscal year budget, said that he would not accept a budget that did not include a hike in the sales tax from 6% to 7%.
  • After the legislature failed to pass Corzine's budget by the deadline of July 1, 2006, he signed an executive order that immediately closed down all non-essential state government services.
  • Corzine lost his reelection bid to Republican Chris Christie. It takes rare talent for Democrats to lose in New Jersey.
  • In 2010 Corzine was named CEO of MF Global and used 40-1 leverage on foolish bets on European bonds driving the company into bankruptcy.
  • MF Global is the first company to go bankrupt in three years while still rated investment grade by rating agency S&P. The previous company was Washington Mutual.
  • MF Global is one of very few companies ever to go bankrupt before making its first bond payment.

Corzine in Bed with Union Leaders, Literally

Many of the above facts were from Wikipedia. Here is a lengthy snip on influence peddling.
In the spring of 1999, when Jon Corzine was running for the United State Senate, he met Carla Katz, the then president of Local 1034 of the Communications Workers Corzine and Katz were soon dating, and they began appearing in public as a couple in early 2002, shortly after Corzine's separation from his wife Joanne. The Corzines divorced the following year. For more than two years Corzine was romantically involved with Katz. She lived with him at his apartment in Hoboken from April 2002 until August 2004.

After Corzine's breakup with Katz, their lawyers negotiated a financial payout in November 2004. According to press accounts, the settlement for Katz exceeded $6 million, including cash (in part used to buy her $1.1 million condominium in Hoboken), a college trust fund to educate her children, a 2005 Volvo sport utility vehicle, and Corzine forgave a $470,000 loan that he had made to Katz in 2002 so that she could buy out her ex-husband's share of their home in Alexandria Township.

Corzine later admitted that he had also given $15,000 to Carla Katz's brother-in-law, Rocco Riccio, a former state employee who had resigned, after being accused of examining income tax returns for political purposes. At the time, Katz was president of the Communications Workers of America Local 1034, which bargains on behalf of many state employees.

In the fall of 2006, during an impasse in contract negotiations between the Corzine administration and the state's seven major state employee unions (including the CWA), Katz contacted the governor by phone and e-mail to lobby for a renewal of the negotiations. Their relationship and the financial settlement Katz received after their breakup led to criticism of potential conflicts of interest in labor negotiations while Corzine was governor.

A state ethics panel, acting on a complaint from Bogota mayor Steve Lonegan, ruled in May 2007 that Katz's contact with Corzine during negotiations did not violate the governor's code of conduct.

Separately, New Jersey Republican State Committee Chairman Tom Wilson filed a lawsuit to release all e-mail correspondence between Corzine and Katz during the contract negotiations. On May 30, 2008, New Jersey Superior Court Judge Paul Innes ruled that at least 745 pages of e-mail records should be made public, but Corzine's lawyers immediately appealed the decision.

Corzine won his case on appeal, and on March 18, 2009, the New Jersey Supreme Court ruled that it would not hear arguments in the case, effectively ending the legal battle to make his e-mails with Katz public. Corzine spent approximately $127,000 of taxpayer funds to keep the e-mails secret. Despite these efforts, on August 1, 2010, The Star-Ledger published 123 of the Corzine-Katz e-mails, revealing the extent of their personal contact during negotiations over a new state workers contract in early 2007.
Corzine Perfect Fit for MF Global

In spite of that background, (or do I mean because of it), MF Global thought Corzine was a perfect fit.

Indeed, those looking for reckless behavior, massive risk taking, and willingness to bet the farm on marriage, in politics, and in life, Corzine represented rare "impossible to pass up" talent.

MF Global Bonds Fail to Make First Payment

In a rarely achieved feat, MF’s Corzine Key Man Bonds Fail to Make First Payments
Bond investors lent MF Global Holdings Ltd. (MF) $650 million three months ago in a bet Jon Corzine would succeed in turning the futures broker into a mini-version of Goldman Sachs Group Inc. The firm filed for bankruptcy before making its first interest payment on the debt.

The former New Jersey governor and Goldman Sachs co-head was deemed so key to the broker’s success that bondholders demanded an extra percentage point of interest if he left for a post in the Obama administration.

On Oct. 24, Moody’s lowered the firm’s credit ratings in part on concern that the company wasn’t sufficiently managing risk. A day later, the broker reported its largest-ever quarterly loss and disclosed how much its exposure to bonds sold by Italy, Spain, Belgium, Portugal and Ireland had grown.

Assurances that all the European debt MF Global had invested in would mature by December 2012 and that the company had financed the transactions through the life of the bonds didn’t stop its shares from falling 66 percent in four days to $1.20 a share. The broker tapped almost all of a $1.2 billion credit line.

Bondholders are now in line with creditors owed $39.7 billion, according to Chapter 11 papers filed yesterday in U.S. Bankruptcy Court in Manhattan.

Corzine’s Fault

“The fact that Jon Corzine, the ex-head of Goldman Sachs, was at the helm for MF Global gave the company a lot more ability to extend their reach than they ordinarily would,” Sean Egan, president of Egan-Jones Ratings Co., said yesterday on Bloomberg Television’s InBusiness with Margaret Brennan.

The balance sheet reached 40 times the firm’s equity, Egan said.

“They should have been levered in the area of maybe about six-to-one,” he said. “Having only 2.5 percent equity to assets is ridiculous. That means if you have a 2.5 percent downdraft in the balance sheet, which is very likely, then they’re bankrupt.”
MF Global Bankruptcy: The Biggest Losers

The Wall Street Journal reports on MF Global Bankruptcy: The Biggest Losers
1) Fidelity funds, 13.9 million shares or 8.44% of common stock

2) Guardian Life Insurance Co., 12.9 million common shares, or 7.8%

3) Fine Capital Partners, 21.5 million shares, 7.37% *(In a recent SEC filing, Fine Capital reporting owning 12.16 million shares, for a 7.4% stake in MF Global.)

4) Cadian Capital Management, 10.2 million shares, 6.17%

5) TIAA-CREF, 9.5 million shares, 5.77%

Corzine swept in last year to lead MF Global, and he had ambitions to remake the company in the image of his former company, Goldman Sachs. Instead, Corzine’s optimism about investing MF Global’s money in European sovereign debt — over the objections of others, according to today’s Wall Street Journal story — helped imperil the firm.

Over the summer, bond investors apparently thought highly enough of Corzine that they demanded a richer payout from MF Global if Corzine left the firm for a high-ranking government job. Today, such a “key man” clause seems like an antique.

Apart from a dent to his reputation, Corzine also stands to lose financially from the MF Global bankruptcy filing. Corzine’s compensation last year was $14.2 million, including stock options MF Global valued at $11.1 million. Those options pay off at a share price of $9.25, which means they are very likely to be worthless now.
Volcker's Campaign Against Proprietary Trading

Bloomberg reports MF Exposes Risk Volcker Wants to Curb
Jon Corzine’s risk appetite helped destroy his firm. It also provided an object lesson for Paul Volcker’s campaign against proprietary trading on Wall Street.

Nineteen months after former New Jersey Governor Corzine became chairman and chief executive officer, MF Global Holdings Ltd. (MF) yesterday filed for bankruptcy. Corzine’s decision to boost risk-taking, including a $6.3 billion wager with the firm’s own money on European government debt, triggered the collapse.

“In the wake of 2008, when we all should have learned a lesson, Jon Corzine told me himself that it was a relatively staid, not risk-oriented firm and he needed to ratchet up the risk,” William Cohan, author of “Money and Power: How Goldman Sachs Came to Rule the World,” said on Bloomberg Television. “Well, he does that and it blows up in his face and for the first time he can’t unwind the trade. Honestly I’m still shocked and it should not have happened.”

Corzine, 64, learned the strategy of making big trading bets during his 24 years at New York-based Goldman Sachs, which he ran from 1994 to 1999 before being forced out.

While Corzine sought to recreate the Goldman Sachs that he remembered, the firm’s current management was reducing risk- taking -- in part in response to the Volcker rule. It closed Goldman Sachs Principal Strategies, a prop-trading team that bet primarily on equities, and the Global Macro Proprietary Trading desk, which wagered on bonds, currencies and commodities.

The Volcker rule also will require Goldman Sachs to reduce investments in private equity and hedge funds to no more than 3 percent of each of the funds -- or 3 percent of Goldman Sachs’s Tier 1 capital. In the latest quarter, such investments were responsible for the firm reporting its second quarterly loss since going public in 1999.

The Volcker rule, as written in the Dodd Frank Act, had “so many different exemptions and exceptions and loopholes that it almost became nearly impossible for the regulators to fashion a rule that can live up to its original intent,” said Barofsky, a Bloomberg Television contributing editor.
Regulators Investigate Missing Money

The New York Times DealBook reports Regulators Investigating MF Global for Missing Money
Federal regulators have discovered that hundreds of millions of dollars in customer money has gone missing from MF Global in recent days, prompting an investigation into the brokerage firm, which is run by Jon S. Corzine, the former New Jersey governor, several people briefed on the matter said on Monday.

The recognition that money was missing scuttled at the 11th hour an agreement to sell a major part of MF Global to a rival brokerage firm. MF Global had staked its survival on completing the deal. Instead, the New York-based firm filed for bankruptcy on Monday.

Regulators are examining whether MF Global diverted some customer funds to support its own trades as the firm teetered on the brink of collapse.

The discovery that money could not be located might simply reflect sloppy internal controls at MF Global. It is still unclear where the money went. At first, as much as $950 million was believed to be missing, but as the firm sorted through its bankruptcy, that figure fell to less than $700 million by late Monday, the people briefed on the matter said. Additional funds are expected to trickle in over the coming days.

In any case, what led to the unaccounted-for cash could violate a tenet of Wall Street regulation: Customers’ funds must be kept separate from company money. One of the basic duties of any brokerage firm is to keep track of customer accounts on a daily basis.

Neither MF Global nor Mr. Corzine has been accused of any wrongdoing. Lawyers for MF Global did not respond to requests for comment.
DealBook stated "the inquiry threatens to tarnish further the reputation of Mr. Corzine".

Short of uncovering fraud, is that possible?

Mike "Mish" Shedlock
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