The fall of Jon Corzine
But is it correct to call it a “fall,” when it’s more as if the man is simply a walking disaster?
From today’s New York Times article on the bankruptcy of MF Global, the investment firm that former Goldman Sachs head, former U.S. senator and former New Jersey governor Jon Corzine took over in March 2010:
In Corzine Comeback, Big Risks and Steep Fall
… MF Global, a commodities and derivatives brokerage house, collapsed on Monday in the biggest bankruptcy on Wall Street since the failure of Lehman Brothers. The firm imploded after a big investment in European bonds—a bet he directed and defended as not particularly risky as recently as last week—led investors, clients and ratings agencies to lose confidence in the firm.
The fall of MF Global, and the discovery that hundreds of millions of dollars were missing from the firm’s customer accounts, have now cast a dark cloud over Mr. Corzine’s legacy and reputation. Federal authorities have stepped up an inquiry into why the firm failed to keep its customers’ money separate from the company’s a regulatory violation.
MF Global was supposed to be Mr. Corzine’s comeback vehicle after New Jersey voters turned him out in 2009. Instead, the collapse of the firm appears to be a humiliating coda to the career of a one-time titan of Wall Street.
His insistence on taking more risks, including buying the debt of European countries like Italy and Spain, along with a contract that would have provided him with an additional $12.1 million if he left the firm, paint a picture of excess….
Friends say this is one more humiliation in a career marked by painful public ousters, whether it was from the executive suite at Goldman or from Drumthwacket, the New Jersey governor’s mansion….
Yet despite his confidence in risk management, Mr. Corzine’s message to traders was clear: Take more risks. “He was instrumental in pushing our firm forward with risk taking in every book, whether it was U.S. government bonds, currencies, or in repos,” said one trader. “Everything was full throttle go.” [LA replies: But of course all this was happening in the period AFTER the finance crisis of 2008 which had been brought on by excessive risk-taking, and from which the economy had not recovered.]
European sovereign debt looked especially tempting. Instead of the near-zero yields on United States Treasury bonds, short to medium Italian and Spanish bonds were earning 2 to 3 percent. Simply holding those to maturity and collecting the yields would buttress profits as other businesses shrank….
LA replies:
But the whole world knew that those countries were in the midst of an impending financial catastrophe which European leaders have desperately been trying to stave off for the last year. The crisis of 2008 (which among other things resulted in the destruction of the huge investment firm Lehman Bros.) had been principally caused by massive investment in at-risk mortgages. So what does Corzine do? He has his investment firm massively invest in the debt of European countries that are on the verge of financial collapse.
Now that Corzine’s Wall Street career is finished, where can he direct his talents next? I’ve got it! He should go into full-time philanthropy. He can follow Bill Gates’s example and invest his personal fortune in various hare-brained schemes to end poverty.
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Doug S. writes:
“Instead of the near-zero yields on United States Treasury bonds, short to medium Italian and Spanish bonds were earning 2 to 3 percent. Simply holding those to maturity and collecting the yields would buttress profits as other businesses shrank…. ”
There must be something else going on. Buying and holding at 2-3 percent and taking the occasional haircut on a trade shouldn’t be enough to wipe out every penny of principal along with that of your customers. It’s as if these firms are betting the whole ranch, and taking out a loan to do so. Are they that stupid and greedy?
Recall the UBS trader who lost TWO BILLION DOLLARS. Who gave a 30 year-old non-fiduciary enough money for that? How could he even go “rogue” with that much money? The only explanation I can offer is a ton of “naked” downside risk.
I don’t understand it, but to my reading neither do the financial journalists. Perhaps you or one of your readers can explain.
Posted by Lawrence Auster at November 02, 2011 08:44 AM | Send