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Corzine's Wreckless Governance

The opinions expressed by columnists are their own and do not necessarily represent the views of

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The aforementioned caption is what investor read in MF Global’s Prospectus Supplement in August 2011.

MF Global issued $325 million of 6.250 percent 5-year senior notes in August 2011. 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 -- like 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 again, eh? 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 files 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 that 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 lets discuss the failure of management at MF Global. Jon Corzine who is considered by many one of the smartest fixed income minds in the business took immeseaureable 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 percent 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 for the greatest financial meltdown seen in the US economy? The answer is simple, here is another example of the entrusted “gambling with other peoples money.” The irony of this is that in the August 2011 Bond deal there is a Key Man clause that states if Mr. Corzine departs 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 percent coupon on their existing 6.250 percent bonds. I beg to differ in that the “clause” should have said if Jon Corzine decides to increase the risk taking at MF Global similar to previous risk position at Goldman Sachs, investors should be redeemed their money at 100 cents on the dollar. We will find out more but another concern, there is approximately $600 million of unaccounted for 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 Corizine 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. I am beginning to think we may have to pad our mattresses again with money, at least you know where it resides and if any is missing. The house pet (cat or dog) can provide better answers than what we hear from the Wall Street experts like regulators and bankers.

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