Jon Corzine, who has known success and failure in both business and politics, is turning his attention to transforming MF Global from a large independent futures broker to a global investment bank. Corzine joined MF Global as chairman and CEO in March, shortly after losing his reelection bid for Governor of New Jersey. He served one term as governor following a term in the Senate. He ran for the Senate after losing out in a power struggle at Goldman Sachs where he served as chairman and co-CEO in the 90s. While some viewed his move to MF Global as a step down from senator, governor and head of Goldman Sachs, Corzine points out that MF Global is larger than Goldman was when he joined it in the 1970s and he sees great growth potential.
Futures Magazine: You like to refer to yourself as a recovering politician and recidivist banker. How difficult of a transition has it been getting back into the financial world?
Jon Corzine: I was honored and charged up about being in public service, so I have some sense of loss in not being able to complete what we started in my view. But, I love business, I love what I am doing and I hope that I made that clear in actions. Financial markets and serving clients have been and continue to be exciting and rewarding and, like politics, really involve thinking about issues on a global macro basis. They allow you to translate the details of policy in public life into business strategy. I am a very fortunate individual.
FM: You exited the financial world leading an investment bank, which is quite different than a futures broker. Why did MF Global bring you in and what is your vision for the company?
JC: I joined Goldman Sachs when it had 1,700-1,800 people; we have almost 1,000 more than that here at MF Global. [Goldman] was only a domestic firm in the mid 1970s; MF Global is in 12 countries and has a tremendous global reach. So, in some ways I am starting at a much better position than earlier in my career. Goldman was a tremendous client-driven firm in the years that I was there and I look forward to creating a franchise that is built around the service and needs of our clients. And it so happens that the regulatory environment is making that more attractive for our expertise in clearing and exchange-traded products. It is sort of the central focus of what we do, so I don’t really question why I am here. I am here because there is a real opportunity to build a great company, one that if it were only what it is today I would be disappointed after five or 10 years of work. But, I expect that we are on track to move from a broker to a broker/dealer, to an investment bank, and from being a significant participant in futures and options markets and commodities markets to being a full-fledged, quality player in all of the activities that we choose to be involved – including those that historically involve foreign exchange, equities, currencies, advisory and money management over time.
FM: The financial sector in general and the futures industry in particular have had a long stretch of pretty accommodative regulatory policy. That has ended with the recent financial crisis. How do you see the industry reacting to this new world and does your experience in government give you a competitive edge?
JC: Well, if you accept that the regulatory structure was relatively light touch, there were real consequences to that. A lot of folks went out of business and there were trillions of dollars of value lost, so I am not one that is as critical as some might be of the new regulatory regime. In fact greater safety and soundness inside the system will create for everybody — starting with the clients that invest — greater value. It also will create greater value in the firms that live in a world where there aren’t people taking excessive risks and unmanaged risk that threaten everybody systemically. I am not negative about the direction we are taking. I would like to see the regulations fleshed out, get them written in an expeditious manner so we know the rules of the road. The regulatory environment in general — there are some specifics that concern me — does not bother me and I think it is a net plus for most market participants.
FM: Does the Dodd-Frank Act even the playing field for FCMs?
JC: A lot of the rules need to be written yet and I worry that there could be a lack of coordination between the various agencies. It yet is to be proven that what the objective of the Financial Oversight Counsel was about ends up happening. I am concerned that there could be differences internationally between various regulatory agencies that still leave arbitrage opportunities and advantages for some firms relative to others. That is why we are going to be an active participant in speaking out. [I have the same concerns regarding] small firms and large firms [and whether] the price of entry could be exclusionary. We’re going to be active participants in that debate so that there is as much of a level playing field for people to be able to participate in as possible. It is important for the strategic position of MF Global that there is attention to equal access and equal opportunity to participate in the new world, particularly with the exchanges and the clearinghouses. The rules could be written in terms that are exclusionary and it is incumbent on those of us who have an interest in that to be very vocal about what would appear to be fairness and important in a competitive landscape for our clients.
FM: Your general counsel had commented in a story, as have some of your competitors, that recent limits put out by CME Group favor larger FCMs and create a false barrier to entry in cleared OTC.
JC: I support my lawyer’s position. If one looks at how the insurance market works and has worked for centuries, there is a syndication of risk at different levels that allows for different levels of participation. To put a threshold limit down is exclusionary.
FM: Are you confident that this will change?
JC: If it doesn’t, somebody will create another vehicle for participation because we are not the only ones that are going to suffer from that. It would be a shame because the CME is a great organization, which has good machinery, and we have a lot of confidence in their ability to do things. But, this doesn’t seem like it is consistent with how the rest of their businesses and markets are run.
FM: Do you want CME Group to have a separate clearing structure for OTC products or have it all in one clearinghouse?
JC: To me the rules of access are more important than whether it is separate or in one clearinghouse. If I was a central banker looking to bring oversight to the system, I would prefer one.
FM: Former President Clinton, speaking at the CME Conference, said he supports Dodd-Frank but added it was important to get the rules done quickly. Do you agree?
JC: It is important to move as quickly as you prudently can do in writing these rules, getting the commentary and moving forward. There is uncertainty in those considerations right now. [These rules] have real implications to our business. We are going to need to know how to work in the world of Dodd-Frank. It creates the rule-making authority to be put forward by the various agencies and it is important to see how well they work together. One of the major problems historically has been that coordination among the agencies has been less than optimal. Dodd-Frank is intended to get greater integration and common view to what the regulatory environment would be, so there wouldn’t be the arbitrage among various players. That is every bit still a question in people’s minds. And secondly, it is even a greater risk when put in a global context. We are all looking for a real answer to those concerns that come from unwritten rules and uncertain coordination.
FM: Dodd-Frank can’t address global regulatory issues. Is that an important element that has to happen?
JC: Absolutely. Dodd-Frank may not be able to impose [on the world], but America’s leadership in this field is essential for other people to fit in, and some might follow our initiatives.
FM: You recently acquired Washington Research Group. What is the significance of this acquisition?
JC: Everything that we just talked about is in play with Washington Research Group. They really have credibility and experience in dealing with the regulatory function. Not just in finance but power, communications and a lot of things that our customers are interested in today and will be tomorrow. Washington, no matter who is in charge, is going to be an important consideration in how people build their business. This is a very well-established, go-to institution for following the details of what is happening in the regulatory and legislative environments. It gives us real strength and a real edge to serve our clients’ needs in putting together their business strategy. It also provides a framework for us to put together U.S.-based research that goes in line with what I would like to do as broker/dealer in the equity space, and ultimately evolve into the investment banking arena. You need to be able to cover companies. It will be a tremendous asset in building the future of MF Global.
FM: Managed futures and hedge funds are growing rapidly, and your former parent (Man Group) was a pioneer in this area. Is that an important part of your growth strategy?
JC: Yes. If you are going to build the factory or have the factory for futures and options and a lot of the other products that are going to be cleared and traded on exchanges, you would want to use that as intensively as possible. And I think that was recognized historically by what was smart leadership of Man Group and it is equally applicable in today’s environment. We’ve already dipped our toe into the water in Asia on this with a joint venture with our partner in Taiwan, and we’re studying how best this could be accomplished going forward. A lot of our clients may want the exposure to commodities and futures-traded products in a way other than just a one-off basis into a specific financial instrument and they may want it in a fund format. Particularly in our retail client base, which we are working to build on what we have in place, it will be an important product line.
FM: How is the zero interest rate policy affecting MF Global? Are you surviving better than your competitors?
JC: It is not a net positive at this point because we are able to acquire and maintain client balances. The lower those short-term rates are, the more challenging it is to generate revenue against those balances. That has historically been, not just for MF but for all FCMs, a major revenue source. It has made it more of a challenge and much more of a risk management responsibility to manage the gap between the liability and the asset that you put against it. We work hard at it, think about it a lot. Because we are a global firm we are not restricted to the menu of opportunities in the United States; that is one of our competitive advantages and we are doing reasonably well for such a low-interest-rate environment. But I have heard a lot of people say that firms like ourselves represent a call on interest rates. If short-term interest rates start rising — which I don’t expect, by the way — anytime in the foreseeable future then we benefit pretty enormously from that increase in rates. But in the meantime we have to be actively pursuing on a global basis the opportunities that allow us to use those credit balances profitably but wisely, and carefully protect the firms and our clients.
FM: Do FCMs need to create a different profit model to survive in this environment?
JC: You should build the profit model of a firm like MF Global independent of interest rates. You should have a model that will make money and be successful in serving clients in all environments. It is not acceptable to say that just because interest rates are low, you don’t have the ability to make money. You have to diversify revenue streams. That is one of the reasons I am so clear on saying we are going from a broker to a broker/dealer to an investment bank. That implies that we are searching for those places where we have natural connections to what we already do to diversify our revenue stream so that we are not locked into this view that interest rates or even commissions, which by the way are constantly eroding, [are the only source of income]. We want to do more than just collect commissions and generate interest income.
FM: The futures industry’s clearing and regulatory model has proven itself in the recent credit crisis. Do you think the industry has done a good job getting this story out?
JC: I can only look at the macro events that have occurred since 2008. We are moving very smartly toward clearinghouses and exchange-traded instruments as the foundation of a lot of the financial market activities in the years ahead, so people are moving smartly towards the model that worked pretty well during the crisis. Even in those places that broke down on an individual basis I don’t think there were any losses because the margining process and discipline on pricing worked and there was a systematic set of rules that were known ahead of time.
FM: By the time this is out we will know the final results of today’s election, but it is pretty clear that the Republicans will gain many seats. What will it mean to Dodd-Frank?
JC: As we sit here right now, we don’t know if the Senate is going to flip. It is pretty certain the House is likely to be in Republican hands and committee chairmen of those areas in the House that have oversight of the regulatory functions will be a challenge for those who want very aggressive rule making. It will be a court of appeals for those that think the rules as proposed are too tough… And then you have the question of how much financial firepower do the agencies get to investigate and enforce rules. It has impact on what the regulatory environment will be. Certainly, you will get more of a laissez-faire attitude out of the new Congress, which some like. Sometimes you have to be careful of what you wish for. It may be ok for my firm to say we have our house in order and we won’t make mistakes and cause other people problems, but somehow or another we ended up with a $17 trillion hole because people made mistakes in how they ran their businesses. It ended up impacting a lot of other people, including other firms. Last time I checked markets are up but I don’t think that value has been recouped. It will become a much more challenging environment to get things done particularly, things that are pro-regulation.
FM: What are the biggest structural changes you anticipate for the futures and financial services arena?
JC: This whole addition of new products, OTC products, onto the exchanges is by far the most important issue. The increased cross-margining arrangements that go on through clearinghouses is also a huge element of positive change that is coming in and around some of the reforms that are coming out.
