My way or the highway

Jon Corzine, who is considered by many one of the smartest fixed-income minds in the business, took immeasurable risk with the capital of his firm. It was revealed that the company was leveraged 40-1. In summary, the company only had 2.5 percent equity invested against risk positions.

Note: Even in the height of the sub-prime crisis, 40-1 leverage would have been considered extremely risky, where small movements in underlying positions could represent deleterious outcomes for investors.

Did the “my way or highway” Jon Corzine not learn for the greatest financial meltdown seen in the U.S. economy? The answer is simple: Here is another example of gambling with other people’s money. The irony of this is that in the August 2011 bond deal there is a Key Man clause that states if Corzine departs prior to July 1, 2013, as MF Global’s full-time chief executive officer due to his appointment to a federal position by the president of the United States and the confirmation of that appointment by the Senate, investors would get an additional 1 percent coupon on their existing 6.25 percent bonds.

I beg to differ in that the “clause” should have said if Jon Corzine decides to increase the risk-taking at MF Global, similar to previous risk positions at Goldman Sachs, investors should be redeemed their money at 100 cents on the dollar. Another alarming concern: There is approximately $600 million of unaccounted-for customer funds.
 
Again the public trust has been breached by those who are entrusted to protect other people’s money. What is the difference between Corzine and Madoff? Corzine lost other people’s money by taking unnecessary and unapproved risks. Madoff stole other people’s money in a Ponzi scheme. What Corzine did might be technically legal, but he certainly did not have approval from his shareholders to take “bet your company” risks.

Where were the regulatory and supervisory agencies? I am beginning to think we may have to pad our mattresses again with money … at least you know where it resides and if any is missing the house pet (cat or dog) can provide better answers than what we hear from the Wall Street experts (regulators, bankers, etc.).