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Corzine Had MF Global Leveraged 80 to 1

This article is more than 10 years old.

It isn't 2008- but Jon Corzine, former Goldman Sachs boss-man, former US Senator and Governor of New Jersey,  was running risks like it  still was 2008. That's the gist of MF  Global's failure. It owned $41 billion in assets, against which it apparently had $39 billion in debt-- and  as protection against that mountain equity capital that did a fast shrinking act from  a pretty puny $500 million plus $325 million of supposedly investment grade debt. We  will have to find out the smarmy truth about why the bond offering hinted at Corzine's possible departure at the very moment he was promising to make his dream of another Goldman come true.

The bottom line  for MF was Corzine's apparent and misplaced confidence in European sovereign debt-- some $6.3 billion of it that he  bought without hedging even $1.00 of it.  European sovereign debt is THE RISKY ASSET CLASS in global markets today. To play fast and loose owning $6.3 billion of securities that can lose value rather promptly-- when you ONLY HAVE  $500 million in equity capital is a bit of Russian roulette. Goldman's risk alarm system would have been set off, as a 10% write-down of that  $6.3 billion European paper wiped out  MF Global's market cap.  End of MF Global. Did Corzine think he knew better than the hedge funds that had been short European paper-- or the money market funds desperately dumping their short-term European bank securities as fast as the markets would allow? Chutzpah, Schmutzpah.

Creating  another Goldman Sachs out of this combination was not a prudent strategy. After all, it took Goldman Sachs only 150 years to become Goldman Sachs. MF Global just didn't have a chance of doing that in a period of risk aversion, unbelievable volatility-- especially in MF Global's  key business-- the buying and selling of futures contracts in gold, silver, oil, copper, iron ore etc. And Corzine, a refreshingly blunt and earthy former farm boy- basketball player from  Illinois, did not have the management skills to pull it off-- what with running the  government securities trading desk as he had 20 years ago-- and drumming up new business in China. When I used to call him, they always told me he was in China.

To put the matter in true historic context Corzine wasn't much up to managing the whole lot of Goldman Sachs in the 1990s either. It doesn't say much about the wisdom of former Cornell wrestler Stephen Friedman that he chose Corzine to replace himself-- though Corzine  was neither familiar with  Goldman's  star bankers or its star industrial clients. The late great John Weinberg was in a fury at Friedman for leaving Goldman Sachs so exposed-- and, had he been alive in 2008,  the ex-Marine Weinberg-- straight as an arrow-- would have tossed Friedman to the wolves if he knew that  the  then Goldman director had bought depressed shares of the firm in late 2008 while serving as Chairman of the New York Federal Reserve Bank. ( Friedman, who was waiting for a waiver from the Fed in Washington about holding both posts-- central banker and private banker--  stood down as central banker  when  the stock purchase was disclosed)

Now, it's important to put MF Global in proper perspective. Its failure is not a risk to the financial system. It is not  the Lehman Brothers calamity or the horrendous costly bailout of AIG to save finance from collapsing.  All that has  collapsed is a firm with 2900 employees, some of them expert in knowing commodity values. All that has collapsed is Corzine's reputation as a  business leader, a manager. Some other firm will pick up the pieces of the  trader in commodities-- which has become in the past 10 years a serious investment asset class. With China on a growth path, commodity prices long term have only one direction to go-- upward.

He still has his years as a liberal  Senator from New Jersey, when he had the honor and the responsibility of raising funds for the Senate Democrats. Followed by a term as the Governor of New Jersey-- who was honored by the Innocence Project this year for achieving the quite tough feat of getting rid of the death penalty in New Jersey.