Corzine Copying Goldman at MF Sends Stock Down as Bet Fails

By Matthew Leising - Oct 28, 2011 3:15 AM GMT+0700

Jon Corzine, who won the top job at Goldman Sachs Group Inc. by leading the firm’s fixed-income unit, now says he’s responsible for trading decisions that have almost wiped out the stock-market value of his futures brokerage.

Since Corzine became chairman and chief executive officer of New York-based MF Global Holdings Ltd. (MF) in March 2010, he’s increased the firm’s risk and used its own money to trade, including investments in European sovereign debt that have tumbled in value. This week, the firm reported its biggest quarterly loss ever, Moody’s Investors Service cut its rating to one level above junk, shares plummeted 61 percent and 6.25 percent bonds issued in August fell into distressed levels.

“On a personal note, our positions and the judgment about risk-mediation steps are my personal responsibility and a prime focus of my attention,” the 64-year-old former New Jersey Democratic governor and U.S. senator said Oct. 25 on an earnings conference call with analysts.

MF Global, the former brokerage unit of London-based Man Group Plc (EMG) that went public in July 2007, is seeking a buyer for its futures brokerage subsidiary and is looking to strike a deal within days, two people with knowledge of the matter said.

The firm has been contacting large banks already in the futures business, said the people, who spoke on condition of anonymity because the talks are private. Under the plan being discussed, its holding company and other businesses wouldn’t be included in the sale, the people said.

Credit Deterioration

Fitch Ratings cut the rankings of MF Global to BB+, the highest junk status, from BBB today, citing the challenges of earning profits from interest in the current “low interest rate environment.” The Federal Reserve target on overnight loans has been between zero and 0.25 percent since late 2008. The ratings company also noted MF Global’s increased proprietary trading.

“These increased risk taking activities have resulted in sizeable concentrated positions relative to the firm’s capital base, leaving MF vulnerable to potential credit deterioration and/or significant margin calls,” Fitch wrote.

MF Global is getting advice from Evercore Partners Inc. as it seeks buyers for the brokerage unit and examines other options, the people said. Market perceptions may leave the firm in the same kind of position faced by banks during the financial crisis in 2007 and 2008, when credit dried up, said Fifth Third Asset Management’s Mitchell Stapley in Grand Rapids, Michigan.

Lesson From 2008

“It’s the one lesson you take away from the 2008 experience,” said Stapley, chief fixed-income officer for Fifth Third, which manages $22 billion. “When sentiment turns on any financial firm that’s dependent on external sources of funding, as really any financial firm is, and if the markets lose confidence in them and you can begin to see sources of funding dry up, the pressures on a firm escalate so quickly, so dramatically.”

Corzine, whose holdings individually and through a trust total 441,960 shares priced at $1.43 each, declined to be interviewed, said Diana DeSocio, an MF Global spokeswoman. The company, which provides execution and clearing services for exchange-traded and over-the-counter derivatives and foreign- exchange products, doesn’t comment on stock or bond price movements, she said.

‘Have to Act’

“They have to act pretty quickly,” Peter Kovalski, a money manager who owns about 25,000 MF Global shares at Alpine Woods Capital Investors LLC in Purchase, New York, said in a telephone interview. His firm manages about $6 billion. “They have to focus on the immediate problems, they shouldn’t be focusing on the long-term strategic plans at this time. They need to be focusing on short-term survivability.”

The Illinois-born son of a farmer and schoolteacher, Corzine graduated from the University of Illinois at Urbana- Champaign in 1969, served in the Marine Corps Reserve and received his master’s degree in business administration from the University of Chicago in 1973. He was recruited by Goldman Sachs in 1975 as a trainee on the government bond desk.

In 1994, with Corzine as co-head of fixed-income, Goldman Sachs’s pretax income fell by more than 80 percent as the company lost money on wrong-way interest rate bets, according to William Cohan’s history of the investment bank, “Money and Power,” published this year by Doubleday. Corzine resisted then-Chairman Stephen Friedman’s calls to scale back risk- taking, according to the book. Still, Corzine rose to chairman that year when Friedman departed.

Russia Positions

Four years later, Corzine, as co-CEO, pushed traders to keep risky positions after Russia announced a devaluation of the ruble and defaulted on some of its foreign debt, while co-CEO Henry Paulson pushed to exit the holdings, according to Cohan. The firm had almost $1 billion in trading losses in the second half of that year.

He left Goldman Sachs in 1999 with an estimated $400 million as the firm went public. Corzine was elected to the Senate the following year and became governor in 2006. He was defeated in the November 2009 election by Republican Chris Christie.

Corzine was recommended for the position at MF Global by former Goldman Sachs banker Christopher Flowers, the chairman and CEO of JC Flowers & Co. At the same time he took the job, Corzine became an operating partner of Flowers’s buyout firm, which in 2008 bought as much as $300 million of preferred stock in the firm at a conversion price of $12.50 a share. JC Flowers controls one of the eight board seats at MF Global.

Investors Cheer

Corzine received a $1.5 million signing bonus and is paid an annual salary in the same amount. He is set to receive a retention bonus of $1.5 million if he’s at the firm as of March 31, 2014.

His arrival on March 23, 2010, was cheered by investors who drove MF Global shares up 10 percent the next day to $8.08. The shares rose as high as $9.76 in April 2010 as Corzine said that the firm’s move toward trading directly with clients was becoming more certain.

By the quarter that ended in June, MF Global revenue from trading with the firm’s own money and from taking the other side of client trades, both Corzine initiatives, rose to 42 percent of sales, from 23 percent a year earlier, the company said at the time.

“We understand trading has attendant risks,” Corzine said on a July 28 conference call with analysts. The focus is on “reducing dependence on one line of business,” he said.

Corzine began adding sovereign debt about a year ago, according to a company presentation. The positions accounted for 16 percent and 12 percent of net revenue in the quarters ended in March and June, the firm said.

Repurchase Agreements

MF Global, which has a market value of $235.8 million, holds $6.3 billion of sovereign debt from Italy, Spain, Belgium, Portugal and Ireland that it’s using in repurchase agreement trades with customers.

In a regulatory filing last month, MF Global said the Financial Industry Regulatory Authority required the firm to boost capital in its U.S. unit because of the repurchase transactions. On Oct. 24, Moody’s cited the European exposure as a reason it cut MF Global’s credit ratings to Baa3 from Baa2.

The repurchase transactions are financed to maturity and don’t need to be re-funded on an ongoing basis, MF spokeswoman DeSocio said.

MF Global increased its repurchase agreements 12.9 percent to $16.6 billion as of June 30, the company said in a regulatory filing.

Stake Declines

Government bonds such as those MF Global has been betting on have fallen in value this year on concern that European leaders will fail to contain a crisis of confidence that’s pushing Greece toward default. MF Global’s largest holding is $3.2 billion in Italian debt. All of the firm’s European exposure matures by December 2012.

Italy’s 6.52 percent notes due in December 2012 have dropped to 101.7 cents from 108 cents on the dollar at the end of 2010, according to data compiled by Bloomberg.

“The European sovereign debt would suggest there’s been a change in the risk appetite,” said Patrick O’Shaughnessy, an analyst with Raymond James & Associates Inc. in Chicago. The Moody’s “downgrade made the threat real that Corzine wouldn’t be able to make good the transition he promised,” he said.

Since MF Global reported its worst-ever quarterly results, losing $191.6 million in the three months ended in September, its stock price reached an all-time intraday low of $1.07 yesterday.

In August, Corzine bought 52,760 shares valued at $295,949. As of yesterday, the stock had declined to $89,692.

Distressed Debt

MF Global’s $325 million of 6.25 percent bonds due August 2016 reached distressed levels on Oct. 25, according to Trace, Finra’s bond-price reporting system. The debentures, which traded as low as 44.5 cents on the dollar yesterday, rebounded to 61 cents to yield 19 percent, or 17.9 percentage points over Treasuries. Spreads of more than 10 percentage points are considered distressed.

“Its bonds are trading at a small fraction of face value, so I’m not really sure it can recover,” said Darrell Duffie, a finance professor at Stanford University and a member of the Federal Reserve Bank of New York’s Financial Advisory Roundtable.

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net.

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.