Markets & Finance

MF Global’s Jon Corzine Runs Out of Luck


In his 24-year career at Goldman Sachs (GS), Jon Corzine made a name for himself as an intrepid trader who pushed the limits of risk. So it makes sense that when Corzine, after almost a decade as a U.S. senator and governor, was named chairman and chief executive officer of MF Global Holdings (MFGLQ) in March 2010, his plan for expanding the futures and commodities trader involved taking more risk. Less than 20 months later the company is bankrupt, days after posting a $192 million quarterly loss and disclosing $6.3 billion in bets on European government bonds. “This goes back to the myth of Goldman people being the best risk takers,” says Janet Tavakoli, who once worked at Goldman Sachs and is now president of Tavakoli Structured Finance, a Chicago firm that advises institutional investors.

Wall Street applauded Corzine’s appointment. MF Global shares rose 15 percent the week his hiring was announced. Says Rob Rutschow, an analyst at investment bank CLSA: “It was like, ‘Here’s Jon Corzine: very connected, very successful ex-Goldman guy. Take him at his word that he’s going to build a world-class, full-service investment bank.’ ” And Corzine struck a statesman-like chord on taking the job. “MF Global is a firm with tremendous potential and excellent talent,” he said. “Profitability and responsibility must go hand in hand with growing our franchise.”

Yet the bankrupcty exposed a lack of internal controls. The day it filed for Chapter 11 protection, New York-based MF Global disclosed a shortfall in customer accounts that people with knowledge of the matter said may be about $700 million. On Nov. 1 a lawyer for MF Global told a bankruptcy judge that all customer money has been accounted for. That same day, Craig Donohue, CEO of CME Group (CME), which has regulatory authority over MF Global, said the company violated requirements that it keep clients’ collateral separate from its own accounts. “We are investigating the circumstances of the firm’s failure,” he said. Corzine did not respond to requests for comment.

While Corzine is known for making aggressive bets, at Goldman Sachs he had to operate within a larger, more cautious corporate culture because partners’ own capital was on the line. At MF Global, Corzine had fewer people looking over his shoulder. “MF Global was a case of, ‘Ratchet up the risk. Let us Goldman guys fix this,’ ” says William D. Cohan, author of Money and Power: How Goldman Sachs Came to Rule the World and a contributor to Bloomberg View.

At Goldman Sachs, Corzine was known for having the nerve to stick with his trades even when they seemed doomed. In 1986 he was responsible for a bet on Treasuries that was losing $150 million, according to several published reports. For five months he refused to cut his losses and ultimately made the firm $10 million when the market changed course.

In 1994 traders working for Corzine were losing $100 million a month on bad interest-rate wagers, according to Cohan’s book, prompting several partners to depart. Corzine again resisted calls to stanch the losses, which contributed to pretax profit plunging 80 percent that year. Even so, by Christmas he was running all of Goldman Sachs. “I could never figure out why out of that he became senior partner,” says Cohan. “He’s the only guy who became head of Goldman who makes me scratch my head.”

In January 1995, at a management meeting, Corzine challenged fellow partners to take more risk with the firm’s own capital and to lift Goldman Sachs’s profits to $2 billion a year for the next five years, according to Cohan. “You can’t achieve the kinds of returns we want just by buying on the bid and selling on the offer,” Corzine told Institutional Investor magazine in September 1995.

Goldman Sachs rode a lucrative wave of mergers and acquisitions and winning trades in the ’90s bull market. Then in mid-1998 came Russia’s financial crisis. The bank suffered $1 billion in trading losses in the ensuing global stock and bond sell-off and failure of hedge fund Long-Term Capital Management. By the end of the year, Corzine was pushed out of Goldman Sachs by Henry Paulson, who had been co-CEO for six months and later served as Treasury Secretary.

Risk taking is not confined to Corzine’s financial career. At least $400 million richer from Goldman Sachs’s 1999 initial public offering, he spent $60 million of his own money on a successful bid for a U.S. Senate seat in New Jersey, which he then parlayed into his 2005 election as governor. In April 2007 he was critically injured in a car crash north of Atlantic City while being driven in an SUV going 90 mph. He wasn’t wearing a seat belt. In a public service announcement recorded after the accident, he said, “I’m New Jersey Governor Jon Corzine, and I should be dead.”

After losing his 2009 gubernatorial reelection bid to Chris Christie, Corzine returned to Wall Street. J. Christopher Flowers, a friend and former Goldman Sachs banker who had a stake in MF Global, recruited Corzine to transform the small futures and commodities dealer into a full-service broker. That would mean taking greater risks by having the company make more and bigger bets with its own capital. As recently as May a company announcement touted “significant sales and trading hires” from rival banks, including new heads of mortgage-backed and asset-backed securities sales and a head of equity derivatives sales.

Risk taking began to account for a greater share of the company’s revenue. In reporting results for the quarter ended in June 2011, MF Global said that revenue from trading with the firm’s own money and from taking the other side of client trades rose to 42 percent of sales, from 23 percent a year earlier. Rutschow, the CLSA analyst, not convinced the brokerage was moving in the right direction, put a sell rating on the shares when they traded at $8 a year ago. “You were looking at a company with so little capital taking on billions in risks,” he says.

Sean Egan, managing director of credit rating firm Egan-Jones Ratings, says MF Global had put itself in a perilous position: It was using so much borrowed money to make investments that a mere 2.5 percent fall in the value of its assets could bankrupt the company. The day before announcing its record quarterly loss, MF disclosed it owned $6.3 billion of bonds issued by Ireland, Italy, Spain, Belgium, and Portugal.

After MF Global’s announcement other banks, hedge funds, and even its own clients stopped dealing with the company. MF Global’s board met through the weekend of Oct. 30 to consider options including a sale, a person with direct knowledge of the situation says. The firm was in discussions with five potential buyers for all or parts of the company, including banks, private-equity firms, and brokers. Discrepancies over the client funds sent Interactive Brokers (IBKR) Group fleeing from a potential acquisition. “The board certainly considered that purchase and stepped away from it at a point where it became clear there were lots of uncertainties about the accounts and segregated funds,” says Hans R. Stoll, an Interactive Brokers director and professor of finance at Vanderbilt University.

With Corzine unable to find a buyer, MF Global filed for protection from creditors on Oct. 31. With $41 billion in assets, it was the eighth-largest U.S. bankruptcy ever and may well mark the end of Corzine’s investing career. “Ironically it was his misjudgments of major trades which have been highly costly to both Goldman and now MF,” says Egan. “We have seen this before: Traders fall in love with their trades and have little ability to take a measured, dispassionate view.”

The bottom line: MF Global was driven to bankruptcy after disclosing a $192 million quarterly loss and big bets on European bonds.

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Farzad is a Bloomberg Businessweek contributor. Follow him on Twitter @robenfarzad.
Leising is a reporter for Bloomberg News in New York.

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