A fallen star

Jon Corzine has gone from a possible candidate for US Treasury Secretary to the man who presided over the fall of MF Global and the eighth-largest bankruptcy in American history, writes Michael Daly

Jon Corzine took over as chief executive of MF Global in 2010. While he was building up his firm’s reputation at home, his core strategy focused on Europe and on buying burgeoning government debt in Italy, Spain, Belgium, Portugal, and Ireland. He used repurchasing agreements to acquire loans to buy the bonds while using the bonds as collateral, incurring huge debt to buy huge debt. Picture: Getty

He gave a lecture in September 2010 on the importance of learning lessons from the financial disaster of 2008. “We need to address the accumulation of debt at every level of our society,” Corzine declared

ON other mornings, the leather upholstered chair at Esquires barbershop could have been a throne, from which Jon Corzine would rise to stride up the street where he had made his name and his fortune. But on this grey, drizzly dawn just before Thanksgiving, the once mighty 64-year-old emerged from the shop at 14 Wall Street looking sunken and defeated.

He moved up the block with a skittish quickness, his blue blazer hanging almost scarecrow-loose on his shoulders, as he nervously raised and lowered a coffee cup to his face, seemingly not so much to take sips as to conceal his face-lest somebody recognise him and maybe ask the big question: “Where’s the money?”

The money being up to $1.2 billion (e890 million) in customer funds that had vanished after the implosion of the investment firm he ran, MF Global. The immediate cause of the eighth-largest bankruptcy in American history was a $6.3bn bet on European debt that Corzine had declared was a sure thing.

He seems to have been blinded less by greed than by need, a need to elevate the little-known MF Global into the league of Goldman Sachs, where this son of an Illinois tenant farmer had risen to become chief executive only to be deposed over a decade ago.

Apart from a press release in which he announced his resignation as MF Global’s chief executive and expressed “a great sadness” for “what has transpired”, Corzine has maintained a shamed and, in the view of many, shameful silence, so successfully avoiding the press and angry investors that one US media organisation jokingly put his face on the side of a milk carton.

That silence may end as early as this week with a bipartisan tar-and-feathering before the US Congress. Its agriculture committee has voted in a rare unanimous moment to subpoena Corzine to appear tomorrow, and he will also likely be called by a committee in the Senate, where he served before resigning to become the governor of New Jersey.

Corzine in public office was the most progressive of politicians and often stuck to his principles at whatever the cost. But at MF Global, that same willful confidence and indifference to public opinion combined with an outsize sense of himself to create disaster. What made Corzine so admirable in politics could conceivably land him in the big house with the likes of Bernie Madoff.

Corzine is either the worst of the good guys or the best of the bad guys. He does not seem to be a thief. The question is whether he allowed hundreds of millions in customer funds to be lost in a last-ditch effort to stave off MF Global’s collapse. One senior executive of the firm insists that nobody was more stunned by the money’s disappearance than Corzine himself.

“I can’t believe the fuck up we just discovered,” the executive heard Corzine say in the hours after the collapse.

This same MF Global executive suggests that what is largely missing from press accounts of the firm’s demise is the condition MF Global was in when Corzine first became chief executive last year. The firm has been described as a “bastard stepchild”, spun off by its parent the Man Group after it acquired the remnants of Refco, which had collapsed after its chief executive stole hundreds of millions of dollars (Refco chief Phillip Bennett pleaded guilty in 2008 to 20 counts of securities fraud and is serving a 16-year term).

The new company was then rocked when one of its traders lost $140m in unauthorised wheat deals.

When Corzine arrived, MF Global was a losing proposition in dire need of new revenue streams and, according to one executive, leveraged an astonishing 50-to-1. The executive, who requested anonymity, says the rating agencies warned Corzine at the outset that they would downgrade the firm’s credit if he did not swiftly increase profitability.

Corzine set about cutting costs, laying off those he deemed unnecessary and bringing in new talent. He raised MF Global’s stature by persuading the Federal Reserve Bank of New York, whose president is his old Goldman pal William Dudley, to name it one of only 20 “primary dealers” authorised to underwrite US government debt.

While he was building up his firm’s reputation at home, his core strategy focused on Europe and buying burgeoning government debt in Italy, Spain, Belgium, Portugal, and Ireland.

He explained that the firm was taking advantage of “dislocations,” where seemingly irrational fears of government default resulted in comparatively high yields in short-term debt. Corzine believed there was absolutely no chance those financially troubled nations would go broke before the bonds reached maturity a year hence.

Thanks to a little magic called repurchased or “repo” agreements, the firm was able to take out loans to buy the bonds, using those same bonds as collateral — thereby incurring monumental debt to buy monumental debt. The interest on the loans was lower than the interest produced by the bonds, and the difference translated into what Corzine considered virtually risk-free profits: $47m in one quarter and $38m in the next, with much more promising to come.

Corzine was so convinced his bet was a sure thing that he failed to heed what he himself was preaching as a visiting professor at Princeton University. He gave a lecture in September 2010 on the importance of learning lessons from the financial disaster of 2008. “We need to address the accumulation of debt at every level of our society,” he declared.

Corzine had then hopped in a car whose chauffeur happened to be a Mafia loan-shark victim, and returned to MF Global. By this point the company was betting $6.252bn on European debt.

MF Global’s board repeatedly expressed concern about the size of the position, according to a published account by Bloomberg. And Corzine is said to have repeatedly reassured them that his strategy was foolproof. What made the looming disaster more perplexing was that Corzine is not a Madoff or some other type of Wall Street greedster. His friend and former fellow New Jersey senator Robert Torricelli figures Corzine remained haunted by his sudden fall from power at Goldman Sachs in 1998 and failed to understand how much Wall Street had changed since then.

“A split in him and a disconnect in time,” says Torricelli.

As for the rating agencies, which so famously abetted the subprime mortgage insanity, the senior MF Global executive says they met regularly with Corzine and were aware of his strategy all along. Less pliable was the Financial Industry Regulatory Authority, which instructed MF Global to increase the amount of actual money it kept on hand to back up the loans.

Corzine had better luck winning over the Commodity Futures Trading Commission, headed by another former Goldman buddy, Gary Gensler. The CFTC was considering a change in something called Regulation 1.25, which allowed a firm to borrow otherwise segregated customer money to buy short-term securities. The CFTC was poised to curtail the practice, and prohibit it with foreign sovereign debt, when MF Global urged the CFTC in writing not to “fix something that’s not broken” and Corzine met personally with Gensler. The vote on the change was put off.

All seemed to be working in Corzine’s favour until the market turned on him this summer. MF Global reported a disastrous third quarter that, combined with further economic turmoil in Europe, prompted Moody’s to drop its rating on MF Global’s debt to a notch above junk on October 24.

Corzine held a conference call with investors the next day and spoke of “the most volatile period I’ve ever experienced”, adding, “I wasn’t around in 2008 because I took a time-out for other purposes.” He nonetheless told investors not to be alarmed. “We will be back on track,” he said.

Two days later, Moody’s and Fitch dropped MF Global’s rating to junk. Investors fled in the equivalent of a run on the bank, giving Corzine a real-life lesson in the principle formulated long ago by British economist John Maynard Keynes and taught in all business schools: “Markets can remain irrational far longer than you or I can remain solvent.”

By October 30, Corzine seemed to have averted a catastrophe by passing the bastard stepchild onto another foster parent. A deal to sell MF Global’s assets to Interactive Brokers Group was all but finalised when auditors noticed $600m of customer money was missing — an estimate that would eventually rise to as much as $1.2bn.

The roots of Corzine’s rise and fall may go back all the way back to an 18th-century John Corzine of Dutch extraction who, according to the Historical Encyclopedia of Illinois, “at one time owned 60 acres in that portion of New York City known as Wall Street”.

The 18th-century Corzine sought bigger and better things by heading west, and two generations later the Corzines had settled in Christian County, Illinois. The most direct descendants became a well-to-do clan of merchants. Others stuck to agriculture, including Corzine’s grandfather, who established a 2,500-acre farm. The grandfather began to hedge against the vagaries of weather and market by dealing in the commodities exchange. That led him into banking, and he became prominent in local politics, until it all came crashing down in the Great Depression.

Corzine’s father toiled as a tenant on a leased 120-acre farm in Willey Station, not one 20th the size of the one the grandfather had owned. Jon Corzine later told the writer William Cohan, author of Money and Power: How Goldman Sachs Came to Rule the World: “My father never had a credit card, was afraid of any kind of financial risk because he saw what happened to his father.”

The writer Cohan would note that the son of the man who never had a credit card would use one to get through business school.

“That’s true of all this baby-boom generation,” Corzine recalled. “They learned to borrow early and big.”

He was soon at Goldman Sachs, and he made partner at 33. At 44, Corzine became chief executive. His No 2, a hyperambitious and fellow Illinois farm boy named Henry Paulson, became a fierce rival. Corzine was confident he controlled enough votes on the executive committee for his position as he set off for a Colorado skiing vacation during Christmas 1998. He returned to discover a presumed ally had turned on him and Paulson had seized control of the firm.

He decided just six weeks later to run for the Senate.

Political consultant Robert Shrum showed him an early poll indicating that his Wall Street reputation led voters to consider him a middle-of-the- road moderate. Shrum remembers Corzine replying, “This is not me; I’m not going to run on this ... I’m going to run as a progressive because that’s what I am.”

After spending $63m of his own money, Corzine was elected, and he proved as progressive as he had described himself. He was one of the 23 senators who voted against the Iraq War, the first to speak out against the genocide in Darfur, and a champion of universal health care and universal access to college. He wrote much of the Sarbanes-Oxley Act of 2002, and was accorded the honour of sitting in the presiding chair for the vote on this bill establishing new protections for investors in the wake of Enron.

He had not yet finished his first term when he ran for governor of New Jersey and won. !!

Corzine lost his bid for a second term to Chris Christie, 49 to 45%.

He was then offered a chance for a new future in finance by an old Goldman friend. J Christopher Flowers had struck out on his own to become a billionaire, and his investment firm was now a major stockholder in MF Global. “Goldman was small when I joined it, too,” Corzine was quoted as saying.

As he renewed his life as a financial chief executive, Corzine also remarried. In April of this year, he and his new wife, psychotherapist Sharon Elghanayan hosted a $35,800-a-plate fundraiser for Barack Obama in the elegant Fifth Avenue apartment she had received in her own divorce settlement. The guests were served chicken potpie, and the president spoke, saying: “Some of you know that Jon was a big supporter of mine in my first US Senate race when nobody could pronounce my name.” There was talk of Corzine becoming the new Treasury Secretary in the way of his old Goldman nemesis Paulson.

That dream vanished with MF Global’s collapse. Corzine would instead be returning to Washington, the subject of inquiries in both Houses of Congress. Tea Party Republicans happily prepared to pillory a big-time Obama liberal from Wall Street.

And the chairwoman of the Senate agriculture committee signalled that in the era of the 99%, Corzine should not expect any breaks from his former Democratic comrades.

Senator Debbie Stabenow said: “The farmers, small-business owners, and others who trusted this firm are now facing tremendous hardship and may ultimately never recover all of their money. Anyone engaged in wrongdoing in this matter must be swiftly held accountable, to help bring justice to victims.”

While preparing to defend himself, Corzine continues to pay regular visits to Wall Street — if only to sit in the throne-like chair at Esquires.

For all his many virtues, Corzine has become the latest Wall Street sinner, the latest to have been blind to the lessons of the past.

With the help of his concealing coffee cup, Corzine was able to leave the barbershop. His driver was waiting in a black 4x4 parked just down from Zuccotti Park and the Occupy Wall Street protesters. Corzine was no sooner in the front passenger seat than he was pulling away and riding down Broadway in the same direction as the famous bronze bull and federal bankruptcy court, where the big question is the missing money.

* Copyright Newsweek/Daily Beast