Global Crisis/Innovation Blog

MF Global’s Bankruptcy:  Here We Go Again?

By Shlomo Maital 


 Jon Corzine  

We are fast approaching Einstein’s definition of insanity (doing the same thing and expecting different results).  We have another major Wall St. bankruptcy, this time MF Global, headed by a financial giant, Jon Corzine, who ran Goldman, Sachs,  was a US Senator, governor of New Jersey…  How can, again, a major Wall St. player undertake irresponsible risk and cause massive harm to his investors?

  Who are Jon Corzine and MF Global?

  Corzine is a folksy ambitious person, who built Goldman Sachs into a Wall St. powerhouse, was pushed out by Hank Paulsen, who later became US Treasury Secretary and disastrously chose not to bail out his former competitor Lehman Brothers on Sept. 15, 2008, and then like Paulsen went into politics.  He is very smart, very ambitious, and though wealthy, chose to try to serve his country, in politics.  He cannot in any way be represented as an evil person.

   What went wrong? 

   MF Global was a firm spun off from a UK hedge fund, Man Group, in 2007.  Man Group is still a huge investment fund and a major player.  Corzine took over MF Global last year and led it to become the eight largest bankruptcy in history.  Corzine ‘leveraged’ MF Global 30 to 1, even though in an interview given when he first took over the firm, he specifically said he would not do this.  That means, he took on debt and obligations 30 times the firm’s capital.  What this means is, if the firm’s assets fall by only 3 percent,  the company has negative net worth. 

   How and why did Corzine do this folly?

   Like most bankruptcies, it came about because of a ‘sure bet’.  Corzine bet that Ireland, Italy, Spain and Portugal would never in a million years allow their sovereign bonds to go into default – even though Russia, for instance, defaulted (under Yeltsin) in August 1998.  So he placed a huge bet, buying huge amounts of bonds of these countries with short maturities, due to mature in 2013, believing that when they matured, he would get full face value for the bonds, while he paid as much as 30 per cent below face value to buy them (a bargain, because of what he believed was irrational and stupid hysteria by bond traders).   What has actually happened, is that the value of those bonds has nosedived, as those countries struggle to raise new borrowing to pay off old debts.  And as this happens, MF Global has been receiving ‘margin calls’ – meaning, they borrowed money to buy those bonds, using the bonds themselves as collateral, and when the bonds fall in price, they are asked to fork up more collateral, to back their loans, and when MF Global was unable to do so, they are unable to meet their liabilities and therefore are formally and officially bankrupt. 

   Where were the people who are supposed to regulate MF Global and other such firms?

   Busy.  The regulator, CFTC,  Commodities Future Trading Commission, has been very busy writing and trying to implement the complex Dodd Frank Act, a crazy-quilt piece of legislation cobbled together in 2009.  They don’t really have the time or manpower to oversee firms like MF Global.

   They should have.  MFG, according to Financial Times, had futures and options positions on the Chicago Mercantile Exchange, amounting to over $100 b., and comprising customers who make up 28 per cent of the trading on this exchange.  MF Global was indeed a big player.    This was not supposed to happen.  MF Global was supposed to have ‘segregated client accounts’, which kept clients’ money separate and provided a firewall for it.  Now, no-one can find hundreds of millions of client money.  It is likely gone forever. 

    What did Corzine say?

    He said he was experiencing “great sadness”.   

   Not as much, Mr. Corzine, as the people whose savings you destroyed, with a reckless and irresponsible gamble. 

   Chances are, MF Global is not the last of its kind.  Einstein got it right.  It is insanity.