Innovation/Global Risk 

The Inside Story About MF Global: $1 b. of Customer Money Is STILL Missing 

By Shlomo Maital





An investigative report in the Global New York Times, by Azam Ahmed, Ben Protess and Susanne Craig, tells the full story of the shocking bankruptcy of MF Global, a hedge fund led by former US Senator , NJ Governor and Goldman Sachs head Jon Corzine. *  The report gets the back pages, but deserves the front page. When someone as visible as Corzine destroys over $1 b. in ordinary people’s money, it deserves attention and outrage.   Especially, in the age of Occupy Wall St., when regulators are supposed to be alert enough to keep such things from recurring. 

    Here is the essence of the story.  Corzine ran MF Global for 19 months.  He played an active, hands-on role, calling himself “chief risk officer”.  He pushed through a $6.3 billion bet on European debt, leveraging his firm’s capital 5 times and even though board members and MF executives protested! 

   MF Global filed for bankruptcy last Oct. 31.  But 10 days before that, facing ‘margin calls’ (losses that required it to ante up more capital to provide collateral for borrowed money), MF Global chose to dip its greedy ugly hands into the money of its customers, money it was not allowed to touch and for which it had strong fiduciary responsibility to protect.  It is one thing for a hedge fund to lose money in trading with its own money. It is another thing to cover such losses by stealing the money of customers who entrusted their money to it in good faith.  Such horrendous misdeeds destroy the entire foundation of the financial services industry, based on trust.   

   Corzine bet that Europe would not let its euro nations default on their bonds, and took on trades of $6.3 b.  He might ultimately be right – but the bond market still thought chances of default were high, and smashed down the prices of the bonds Corzine bet on.  Corzine was unable to meet margin calls as his bet turned sour. 

   According to the NY Times, Corzine “torpedoed an effort to build a new risk system, a much-needed overhaul (at MF), according to former employees, arguing it was ‘unduly expensive’.”  

   Corzine’s plan was flawless.  Borrow money. Use it to buy bonds of Italy, Ireland and other troubled nations.  Buy ‘short’ bonds that mature at the end of 2012.  Assume the bonds will be paid in full at maturity, because the EU will bail out the troubled nations.  And this is what will happen. Except, in the interim, during the recent crisis, the bond prices fell so steeply that Corzine’s MF fund did not have enough collateral to cover the loans.  If you cannot ante up enough collateral, you are forced into bankruptcy.  And even after Corzine’s MF fund stole a billion bucks worth of its customers’ money, it still wasn’t enough to forestall bankruptcy on Oct. 31.  Now, people are looking for the ‘customers’ funds’ MF Global stole.  This is pointless.  It is gone. 

    Every time an episode like this occurs, people talk about ‘rogue traders’,  ‘errant truants’, and ‘one-off mistakes’.  But they happen far too often.  And the irony is, the European debt trades Corzine initiated will ultimately be profitable – but not in time to save MF Global.  In finance, as in comedy, timing is everything.

* “The high-roller behind MF Global’s demise”,  Global NY Times, Dec. 13/2011.