Corzine decisions led to MF Global's collapse

Corzine takes over

When Corzine joined the firm in 2010, he widely publicized the fact that he intended to transform the firm into a full-service investment bank — a Goldman Sachs-mini. But that transformation would require capital. To fund his vision for the firm, Corzine personally took on the role of head-trader and began taking positions in European sovereign debt. “Because of this risk to the company’s income statement and the time it would take to realize gains, a direct investment in the bonds themselves would not achieve Corzine’s objectives. However, the company discovered that it could book quick profits by purchasing the bonds and then using them as collateral in a transaction known as a repurchase-to-maturity (RTM) agreement,” the report says.

In addition to this expansion into new revenue streams, Corzine created an authoritarian atmosphere at MF Global in which his decisions were not to be questioned. The report notes that when Michael Roseman, MF Global’s chief risk officer, argued against expanding the limit on the sovereign debt positions in September 2010, Corzine began looking to replace him.

In November, the board approved expanding the European RTM portfolio to $4.75 billion and Corzine informed Roseman that he would no longer report to the board but to COO Bradley Abelow. Abelow had been Corzine’s chief of staff when he was Governor of New Jersey. In January 2011, Corzine dismissed Roseman and replaced him with a new chief risk officer, Michael Stockman.

By August 2011, these RTMs were coming to light at regulators, and the Financial Regulatory Authority (FINRA) made demands that MF Global begin taking haircuts on these positions. As these positions came to light to credit rating agencies, the firm began to face a liquidity crisis as its credit rating was put on negative outlook.

Although FINRA’s charges against MF Global were filed on Sept. 1, they didn’t really come to the public’s attention until an Oct. 17 story by the Wall Street Journal. The timing proved to be fateful because the firm was to release its worst ever quarterly earnings report on Oct. 27, which would announce a loss of $191.6 million.

To try and head-off some concerns, Corzine moved the company’s earnings call up to Oct. 25. During the earnings call, Corzine and CFO Henri Steenkamp tried to assure investors that the firm was in the best financial situation it had ever been in. According to the report, “Corzine also sought to clear up ‘clouded perceptions’ about the company’s European RTM portfolio, asserting that the trades had ‘relatively little underlying principal risk’ and had realized ‘zero’ loss. ‘On a personal note,’ Corzine added, ‘our positions and the judgment about risk mitigation steps are my personal responsibility and a prime focus of my attention.’”

The call did little calm customers’ anxieties, and as credit rating agencies cut the firm’s rating to junk status, customers and counterparties sought to distance themselves from the firm. “MF Global’s customers and counterparties also reacted to the earnings news, and as the crisis deepened, MF Global faced a liquidity drain of crisis proportions…One counterparty, HSBC pulled MF Global’s line of credit and ordered the company to wind up its business with the bank by the end of the year,” the report says.

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