American Elephants

The Marvelous Michael Ramirez, Once More. by The Elephant's Child

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MF Global And The Mystery of the Missing Money by The Elephant's Child

For those who haven’t been following the ins and outs and ups and downs of Wall Street, the bankruptcy of MF Global Holdings Ltd. may be a bit of a mystery. The firm’s roots go back for more than 200 years, but by 2010 it was struggling.

When Jon Corzine, a Democrat, was defeated in his bid to be re-elected as governor of New Jersey by Republican Chris Christie; a MF Global shareholder and close friend persuaded Mr. Corzine to run the company.  Mr. Corzine was intrigued by the opportunity to turn the struggling firm around.  Mr. Corzine had been an aggressive bond trading star at Goldman Sachs in the 70s, and eventually climbed to become CEO of that firm. He ran for the Senate from New Jersey, and subsequently became governor of New Jersey.

Mr. Corzine arrived at MF Global with a plan to move the firm to become a full-fledged banking firm, a big change for the company.  He moved quickly to cut hundreds of employees, and hired 1.200 new traders.  He encouraged traders to make larger bets, and increased the emphasis on higher-risk products like mortgage-backed securities and stock-index derivatives.

To address the short-term pressures, Mr. Corzine turned to a quick fix, investing in high-yielding European sovereign bonds structured as a “repurchase to maturity” which meant that the firm could book profits on the trade up front, and keep the risk off the balance sheet.  He was confident that European leaders would not allow default.  He got the quick jolt he wanted with about $39 million in revenue from the European trade.

As Mr. Corzine continued to accumulate the bonds, some in the firm became nervous. Eventually the European bet had grown to $6 billion. In August and September MF Global’s shares dropped by more than 40% as worries about Europe’s financial stability  hammered financial stocks.  On October 31, the company filed for bankruptcy as rescue efforts failed, and only about 500 employees remain.

According to the bankruptcy trustee of MF Global’s brokerage unit, an estimated $1.2 billion in customer funds remains missing, and nobody knows where the money went. Brokerages are required by law to separate customer assets and the firm’s assets. The shortfall has snarled the finances of thousands of traders, farmers and commodities customers. Mr. Corzine and other executives face increasing probes from regulators, Congress and law-enforcement officials into the firm’s demise.

Meanwhile, back in New Jersey, Chris Christie is struggling to put the state of New Jersey’s house back in financial order. Mr. Corzine has been one of Barack Obama’s  most successful “bundlers” raising Wall Street money for the president’s campaign. He was high on the list for Secretary of the Treasury, but that job went to tax-avoider Tim Geithner. All very interesting.

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