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Corzine, Condensed (‘Implode’s “Instant Counter-Spin”)

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by Aaron Krowne
Founder, ML-Implode

Well, Jon Corzine showed up and testified in front of Congress today, defeating some speculation that he had simply vanished. And to his credit, he did talk, not once taking the fifth, as he could have.

But we were not surprised to find that, though his mouth moved, he didn’t say much. It was clear from his words (as well as hestitation) that he is speaking with the investigations (and client, and now shareholder litigation) against him in mind. He is choosing his words carefuly, and such that he doesn’t expose himself to legal liability (even if he deserves it). As such, he almost completely shrugged off responsibilty for or knowledge of the particulars of the MF Global debacle, while still uttering platitutes like “I accept responsibility”.

That’s your executive summary. Below is a detailed press round-up, with some comments from us.

BusinessWeek provides a nice thorough overview, with some gems:

[Corzine] said that since his resignation from the firm, “I have not had access to the information that I would need to understand what happened,” Corzine said. “It is extremely difficult for me to reconstruct the events that occurred during the chaotic days and the last hours leading up to the bankruptcy filing.”

Well, isn’t that convenient! He don’t know nuthin’ ’bout what happened, ‘cuz he left after he lit the match! (This parallels Gensler’s silence in the name of recusing himself from handling the disaster, while saying little to nothing about how he worked closely with Corzine previously to lay the groundwork for it).

The article also points out:

Under current rules, customer money is supposed to be kept segregated from the firms’ accounts. “We were receiving daily segregation reports from MF Global and those did not raise red flags for us until right before the bankruptcy,” Sommers said.

If funds are missing because of internal errors at MF Global, Corzine may have breached responsibilities under Sarbanes-Oxley rules, according to Daniel Collins, a professor of accounting at the University of Iowa’s Tippie College of Business.

Under the 2002 law — for which Corzine voted as senator — top executives must certify the accuracy of financial statements and assess whether they have sufficient safeguards to catch fraud and bookkeeping errors. Corzine signed off on MF Global’s quarterly reports prior to the bankruptcy.

Ah, Sarbanes-Oxley — hoisted by one’s own petard!  That always smarts.

Of course, if the above is the case, Corzine should have a lot to say (and answer to) about what happened, because SOX was primarily supposed to catch CONTROL FRAUD, and control fraud is clearly a central factor here — somehow, the money was “lost”, which requires a lapse in control. At least half of this is not a matter of the one-time event, but rather, the system in place, which Corzine presided over.

Also in BusinessWeek:

In his statement, Corzine for the first time provided details on so-called repurchase-to-maturity transactions that have drawn legal and regulatory scrutiny in the weeks since the bankruptcy. He described himself as a “strong” advocate of the transactions while saying that because he isn’t an accountant he can’t vouch for the way the transactions were handled.

Corzine is apparently still bullish on the repo-to-maturity bets that were the gasoline (which he poured) that formed the dry tinder of the MFG collapse. Amazing!

And that he denies culpability due to “not being an accountant” is quite rich. To us, it doesn’t hold water. Assuming he really is this clueless, he is painting himself as a far-removed figurehead (much like Ken Lay did in his Enron defense), when it is clear he was very closely involved with transforming MFG under a new strategy. The fact he was dictating bets to be made with client funds and collateral, while receiving a waiver from having a broker’s license, suggests that a strict division-of-labor defense is not relevant to him.

Also from the same article:

“Despite our best efforts to sell assets and generate liquidity, the marketplace lost confidence in the firm,” Corzine said.

This is a big pet peeve for us: the “it wasn’t the leveraged, risky bets we made — it was the market doubting us that did us in!” defense. It is the hue and cry of virtually every leverage-driven collapse or Ponzi scheme. Sure, it’s half true — the market did react — but the market doesn’t tend to go around doubting firms that aren’t making highly-leveraged, risky bets in the first place (remember that Corzine piled on the European sovereign debt bets because of the volatility, so its hard to see how he wasn’t inviting market scrutiny/skepticism).

The irony here is Corzine is essentially blaming “the speculators”.

This is a good one, from Bloomberg:

Jon S. Corzine told lawmakers that he never intended to break any rules in his role as chairman and chief executive officer at MF Global Holdings Ltd., the New York brokerage that sought bankruptcy protection on Oct. 31.

“I’m not in a position — given the number of transactions — to know anything specifically about the movement of any specific funds,” Corzine said today at a House Agriculture Committee hearing in Washington. “I certainly would never intend to direct” misuse of segregated client funds, he said.

Regarding not intending to break rules, this is interesting, because there’s a somewhat “open question” of how far brokerages can go to make bets with client funds. Corzine and others lobbied the CFTC to allow bets to include foreign sovereign debt, and the regulators appear to have been silent on the (apparently) common practice of “sweeping” client funds to overseas (usually UK) subsidiaries in order to make these bets with higher gross leverage.

So, did he intend to do this? It seems like it. And it seems to us that, regardless of the CFTC’s rule, “sweeping” funds overseas simply to avert other US rules (i.e. on leverage) is, ipso facto, illegal. This seems like an instance where the regulators should, but could choose not to prosecute, because “everyone was doing it”.

The second remark is also noteworthy: Corzine is again shirking responsibility for what happened because he “cannot police every transaction.” Again, that ignores his responsibility for the controls in MFG’s systems, as well as the fact that if counterparties rightfully seized whatever collateral was presented to them by MFG, it’s not like the issue was that some low-level flunkee simply “misplaced” the $1.2 bln.

Bloomberg has another article with some pertinent tidbits with Corzine’s remarks on MFG leverage and the press:

Corzine sets the record straight. MF Global was not nearly as leveraged as the evil press makes it out to be. No, MF was not leveraged at 37 to 1, according to Corzine. Rather it was leveraged only 30 to 1, and Corzine is proud to tell you he had a hand in bringing that leverage down.

Never mind that, in the post-Dodd-Frank era, firms such as Goldman Sachs (of which Corzine was once the senior partner) have leverage now of around 12 to 1. Corzine would have us take comfort from the fact that, in his construct, MF investors were better protected thanks to him. At a 30-to-1 ratio, it required a 3.3 percent decline in the value of MF Global’s assets to wipe out its equity capital. Thanks, Jon.

Not much to add to these remarks… but we wonder how Corzine is even so sure about the effective gross leverage, since he’s “not an accountant” and wasn’t “policing the transactions” or trades.

This seeming-certainty about what he was “doing right”, contrasted with his total cluelessness about the systemic lapses and the collapse event, reeks of legalistic posturing.

The LA Times notes the blame game:

Corzine deflected blame for the company’s collapse. He argued that he inherited a firm already doomed by his predecessors’ bad financial decisions.

Wow! That’s a pretty fantastic claim, but again, it seems like the kind insubstantial nonsense that is of legal benefit for him to spout, in order to divert some of the public heat.

ABC News has an excerpt about Corzine’s willingness (or lack thereof) to “own” the disappearance of funds:

Corzine, who said he personally invested $3 million in MF Global, said he would not use his personal fortune to help repay the farmers and ranchers who will potentially lose money because of the firm’s bankruptcy.

“I don’t think that this will go unresolved,” Corzine said. “I believe that the missing funds will be found.”

So he “takes responsibility” generally (but denies it in  all specifics), and is unwilling to contribute to the pool to make clients as whole as possible (hell, not even a “farmer relief” fund, Jon?)

Oh, we see why — he thinks the “missing funds will be found”. Well, we are relieved.

The same article has more excerpts about the accounting mess:

“I simply do not know where the money is, or why the accounts have not been reconciled to date,” Corzine said. “My understanding is that our books and records were reflecting the chaos that occurred in the last two or three days as the firm was under severe pressure and had lost the confidence of the marketplace.”

While Corzine offered little insight into where the money disappeared, James Kobak, the lead council on MF Global’s liquidation process, said he expects that, unless the missing money is found, the firm’s 38,000 customers will only be able to recoup about 70 percent of their money, which should be paid out in two to four weeks.

Kobak said the $1.2 billion is hard to find because the firm’s records are “a mess.”

This is revealing, because again, the problem for Corzine is not so much where the funds are, but how he could allow the firm to be run such that they could be lost.

Kobak’s remark is tantamount to admitting that Corzine presided over an accounting mess.  Convenient, we’d say, for hiding excessively-geared bets.

There Are 2 Responses So Far. »

  1. Great analysis and summary, Aaron. I would not be surprised if Corzine watched Godfather II more than 20 times to prepare himself for his testimony. He should get an Oscar.

  2. That’s not all he should get.

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