MF Global decline on Corzine's shoulders

Nov 16, 2012

Customers who suffered losses at the hands of MF Global have been waiting over a year for the mythical “smoking gun” to be found. While that particular metaphor might remain unfound, there are at least official fingers pointing… at Jon Corzine.

A long-in-coming report on the downfall of MF Global was released Thursday morning, Nov. 15. Ultimately, the report found that radical changes made to the company’s business goals and professional culture by CEO Jon Corzine “sealed its fate.”

The report was issued by the Subcommittee on Oversight and Investigation (Oversight Subcommittee), which operates under the House of Representative’s Financial Services Committee. It was the culmination of roughly a year of investigation by the Oversight Subcommittee into the collapse of the 230-year-old commodities broker and has been called “an autopsy of how MF Global came to its ultimate demise and what can be done to prevent similar customer losses in the future.”

“During his nineteen-month tenure as Chairman and CEO of MF Global, Jon Corzine made several fateful decisions, the cumulative effects of which caused MF Global’s bankruptcy and jeopardized customer funds,” read the first line of the findings portion of the report.

The report identified three major areas which led to the company’s collapse: a radical change in business strategy and what has been described as an authoritarian culture which insulated risky behavior from usual regulatory protocol.

Oversight Subcommittee Chairman Rep. Randy Neugebauer, R-TX, summed up the situation:

“Farmers, ranchers and other customers may never get back over $1 billion of their money as a result of his decisions. Corzine dramatically changed MF Global’s business model without fully understanding the risks associated with such a radical transformation.”


The first nail in MF Global’s coffin was Corzine’s desire and moves to turn the successful commodities broker into a full-service investment bank. This came as a possible solution to rescue the firm from recent years of profit problems which preceded Corzine’s tenure.

“Shortly after arriving at the company in March 2010, Corzine announced his strategic plan to restore MF Global’s profitability by turning the company into a global investment bank (a ‘mini-Goldman’) and securing a primary dealer designation for [MF Global’s U.S. branch] from the Federal Reserve Bank of New York.”

Corzine’s main effort to return profitability to the company focused heavily on purchasing European sovereign debt bonds and using their high-risk high-reward nature to generate revenue. Reportedly, he also planned to use the bonds as collateral in repurchase-to-maturity transactions which were core to his strategy.

This move was something which came naturally to Corzine, given his past experience as CEO of Gold man Sachs, but it was not well-suited to MF Global.

“By expanding MF Global into new business lines without first returning its core commodities business to profitability, Corzine ensured that the company would face enormous resource demands and exposed it to new risks that it was ill-equipped to handle,” the report said of the strategy shift.

The report also quoted an unnamed head of a rival company who said the idea of taking a broker and making it into an investment bank was “an utter impossibility… They do not have the deep culture that Goldman has of handling risk. You cannot leap with a single bound into proprietary trading and hope to survive intact.”

The obsession with European sovereign debt bonds resulted in eventual downgrades and increased demand for liquidity to back trades.

“Under Corzine’s direction, MF Global’s net position in European sovereign debt increased to $6.3 billion just weeks before the company’s collapse.”

This situation reportedly led to the company’s growing dependence on dipping into customer funds to back its own trades. Originally, the habits had been to pay the accounts back by the end of the day, but when things got particularly chaotic at the end of the company’s crash, there was no money to pay back those accounts. This, of course, resulted in the loss of $1.6 billion in customer funds.


The report cited an “authoritarian atmosphere” created by Corzine which exacerbated the risky moves he was taking with the company.

“[The risks of heavy investment in European sovereign debt bonds, etc.] were compounded by the atmosphere that Corzine created at MF Global, in which no one could challenge his decisions. He hired his former gubernatorial chief of staff, Bradley Abelow, to serve as the company’s [chief operating officer]. When Michael Roseman, the company’s [chief risk officer] disagreed with Corzine about the size of the company’s European bond portfolio, Corzine directed Roseman to report to Abelow rather than to MF Global’s board of directors. This change effectively sidelined the most senior individual charged with monitoring the company’s risks and deprived the board of an independent assessment of the risks that Corzine’s European RTM trades posed to MF Global, its shareholders, and its customers.”

The report went on to describe Corzine as the company’s “de facto chief trader” and said his behaviors coupled with his position as chair of the board of directors insulated his trade decisions from usual risk-assessment protocols. This protective behavior included work-arounds which allowed the highest-risk items to not appear on the company’s balance sheet, thereby not disclosed to regulators.

Another area of the harmful professional culture espoused under Corzine’s leadership was a fractured system of managing the company’s liquidity and protecting customer funds, as well as an unresponsive internal mechanism to deal with discovered problems.

“Under Corzine’s leadership, the company failed to address concerns raised in an internal audit suggesting that MF Global’s liquidity tracking and forecasting capabilities lagged behind the firm’s evolving business needs. Consequently, MF Global was unable to coordinate its activities during the liquidity crisis in its final days of operation.”

The report ended its findings section with this rather scathing indictment against Corzine:

“Prosecutors and MF Global’s regulators will determine whether the company or its employees violated laws or regulations when these withdrawals were made. However, the responsibility for failing to maintain the systems and controls necessary to protect customer funds rests with Corzine. This failure represented a dereliction of his duty as MF Global’s Chairman and CEO.”


The report includes a number of recommendations for the future, citing the intense need to restore consumer confidence in the futures markets. Among its primary recommendations was a call for Congress to consider legislation to impose civil liability on top officers of commodities brokerages who sign off on certain transactions.

This proposal—often called the “Corzine Rule”— has been made and implementation has begun with the Commodities Futures Trading Commission (CFTC). The Oversight Subcommittee’s recommendation would make the Corzine Rule a federal rather than industry regulation.

Another recommendation made to Congress by the Oversight Subcommittee’s report was to “explore whether customers and investors would be better served if the SEC [Securities and Exchange Commission] and the CFTC streamline their operations or merge into a single financial regulatory agency that would have oversight of capital markets as a whole.”

This suggestion came from the observation that neither CFTC nor SEC had meaningfully communicated with each other regarding what they knew of MF Global. The report concluded that, while the collapse might not have been prevented if proper communication had existed between the two, the problems might have been noticed and addressed sooner. This could have prevented losses suffered by customers.

Other recommendations include amending SEC’s reporting requirements so that loopholes which allowed the magnitude of MF Global’s risky European sovereign debt bond holdings to fly under the radar would be closed, as well as further consideration of Dodd- Frank-style legislation to hold public ratings companies more accountable. — Kerry Halladay, WLJ Editor