Jon Corzine is not a crook. No, really.
The Justice Department’s investigation of the former Wall Street titan, New Jersey Governor and U.S. Senator concluded last summer that he’d done nothing wrong. Or at least nothing criminal.
That despite the fact that the firm he once headed, the ironically named “MF” Global, improperly siphoned nearly $1 billion from its customers’ accounts – money it could not legally touch – to cover its bad bets on European sovereign debt, then promptly lost it all when those bets continued to sour. The money is gone. Those who entrusted Corzine and his colleagues with it are, as the firm’s name suggests, F’d.
In defending himself against civil actions, Corzine claims to have had nothing to do with the decision to raid his clients’ so-called “segregated accounts” – segregated because the law required that they be kept separate from the firm’s own proprietary investments. It was money entrusted to MF Global, not put at its disposal.
Losing nearly $1 billion of other people’s money is no big deal for a former Governor and federal lawmaker. It takes the federal government a little more than 2-1/2 hours to spend that amount and government beancounters years to figure out what is was spent on. Even the most scrupulous inspectors general can only guess at how much may have been squandered.
So, Corzine might rightly ask, what’s all the fuss about?
The Commodities Future Trading Commission (CFTC), which is pursuing civil (as opposed to criminal) charges against Corzine and his former firm, put it this way:
MF Global Inc., … on the brink of failure and in desperate need of cash to survive, invaded its customer funds and violated … fundamental customer protections on a scale never previously seen in the U.S. futures markets, harming thousands of people (CFTC complaint, paragraph 1).
The story began in March 2010 when Corzine joined the firm, just months after losing his bid for a second term as Governor. The complaint says that he immediately set out to make MF Global a major player in European sovereign debt. As a result of his actions, CFTC alleges, these investments grew substantially, even as they turned “increasingly risky” (paragraph 3).
The risk grew because Corzine was placing outsized bets on debt issued by such countries as Greece, Spain and Italy, just as markets woke up to the fact that those governments were in over their heads. Corzine, who seems to have had a child-like faith in government that is characteristic of the center-left, thought there was a fortune to be made in betting in favor of these governments just as other investors started to doubt their creditworthiness. As it turns out, there were fortunes to be lost – not only his firm’s, but that of its clients.
“By late October 2011,” the complaint states, “the firm’s sources of cash were drying up, and the firm was in desperate need of funding to survive” (paragraph 4).
Frantic for money to pay off its bad bets and shunned by other banks because of its parlous state, MF Global crossed a legal line, according to the CFTC.
During the last week of October 2011, in violation of U.S. commodity laws, with virtually no other sources of cash to keep it afloat, MF Global unlawfully used nearly one billion dollars of customer segregated funds to support its own proprietary operations and the operations of its affiliates. Thousands of customers were directly and indirectly harmed by these unlawful acts (paragraph 5).
The desperate and allegedly unlawful ploy failed. MF Global filed for bankruptcy protection on October 31, 2011. The CFTC places the blame squarely on Corzine.
Corzine bears responsibility for MF Global’s unlawful acts. He held and exercised direct or indirect control over MF Global and Holdings and either did not act in good faith or knowingly induced these violations (paragraph 6).
The complaint also singles out Edith O’Brien, the firm’s Assistant Treasurer, saying that she “directed, approved, and/or caused numerous illegal transfers of customer segregated funds to the Film’s proprietary accounts, and otherwise aided and abetted MF Global’s customer segregated fund violations” (paragraph 7).
Corzine, according to the complaint, plunged MF Global almost immediately into complicated and risky transactions involving European sovereign debt. The firm borrowed heavily to buy these bonds. To finance their purchase, it entered into contracts with counterparties, pledging the bonds themselves as collateral, and promising to pay back the money when they matured. On paper, this was a winning proposition for MF Global, in part because it could record prospective interest payments on the bonds as a gain on its books.
As with the overheated market for mortgage-backed securities on which investors reaped profits so long as housing prices continued to rise, MF Global prospered so long as markets believed in the soundness of the bonds that it had borrowed money to buy. The risk was that MF Global had to make margin calls related to these transactions. Should faith in Italian, Greek and Spanish bonds (which the firm had used as collateral) weaken, MF Global would have to come up with cash from another source to satisfy its counterparties (paragraph 33).
MF Global was aware of these risks. Just months after Corzine embarked on his dicey strategy, the firm’s Chief Risk Officer warned of the dangers and recommended limiting these investments. His advice was ignored and Corzine replaced him the following March (paragraphs 34 and 35).
Not long after, that risk became real as European sovereign began to go south. During the summer of 2011, the firm needed to find hundreds of millions of dollars to meet its obligations to counterparties. Desperate for cash, Corzine directed his subordinates to “explore all potential sources of funds and assets” that could be used to cover its bets. “All potential sources,” according to the complaint, included money from its clients’ segregated accounts (paragraph 44).
By early October, the firm’s Treasurer concluded that it was “skating on the edge” without “much ice left” (paragraph 48). But there was a lifeline: a $1.2 billion line of credit with JP Morgan Chase. Corzine, however, decided against tapping that line, fearing that it would reveal the firm’s fragile state to Wall Street. Instead, he told an employee that they would do everything possible to avoid using the credit line, even if that meant siphoning money from client accounts (paragraph 49).
Despite the increasingly risky behavior, Corzine brushed aside warnings from his subordinates. One employee warned him that “the situation is grave.” MF Global’s Treasurer said, “We have to tell Jon that enough is enough. We need to take the keys away from him.” Corzine refused to relinquish the keys and disparagingly nicknamed the Global Treasurer “the Gravedigger” (paragraph 50).
By that point, MF Global’s grave already was dug. Corzine just didn’t realize it. The complaint alleges that he “remained determined to squeeze the MF Global’s customer segregated accounts and customer secured accounts for cash” (paragraph 52).
Despite repeated warnings about the liquidity crisis, and despite his knowledge of the deficiencies in MF Global’s systems and controls, Corzine did not take sufficient steps to ensure that the Firm’s daily draws of cash from … customer accounts did not result in an unlawful use of customer funds (paragraph 57).
During the last week of October, MF Global received a ratings downgrade from Moody’s (paragraph 58) and reported negative earnings for the previous quarter (paragraph 59). By this point, Corzine had begun using the firm’s line of credit, drawing down all but about $300 million by October 25 (paragraph 61).
The walls were closing in. Counterparties were demanding more money and customers were pulling their accounts (paragraph 60). By that time, the firm had become addicted to using money from these accounts to survive (paragraph 62). A panicked O’Brien, desperate to restore money to customer accounts before regulators caught on, told a colleague in a taped conversation:
It is a total clusterfuck …. They have to move half a billion dollars out of [Bank of New York] to pay me back …. Tell me how much money is coming in and I will make sure it gets posted. But if you don’t tell me, then tomorrow morning I am going to have a seg problem …. I need the money back from the broker-dealer I already gave them. I can’t afford a seg problem (paragraph 62).
That “seg problem” – leaving customer “segregated” accounts short money — was never resolved. It grew worse by the day. By Friday, October 28, customer accounts were $900 million short (paragraph 64). MF Global “filed a false segregation report” for Thursday, October 27, to conceal this fact (paragraph 64), then refused throughout the weekend to file its Friday report (paragraph 68).
With its debt no longer manageable and its customer accounts depleted, the firm filed for bankruptcy protection that Monday. Corzine needed just 19 months to take a successful firm into insolvency, draining its resources and that of its clients, and damaging his own reputation in the bargain. But none of this, the Justice Department says, was in any way criminal.
Corzine claims not have known anything about the raid on segregated accounts that cost the firm’s clients nearly $1 billion. And though federal prosecutors decided not to pursue criminal charges against him, the CFTC isn’t conceding his innocence. His behavior, their civil complaint alleges, if not willfully criminal, was willfully negligent. He knew, or should have known, that his firm was flouting the law, improperly dipping into its clients’ accounts and hoping against hope that it would be able to regain lost ground and replace the money before its regulators learned of its misdeeds (paragraphs 69 and 70).
Corzine’s defense essentially amounts to this: that he was nothing more sinister than an incompetent manager, unaware that his colleagues were unlawfully violating their clients’ trust, as he plunged his firm into the abyss. He didn’t realize how much trouble his firm was in and the extreme steps that his subordinates were taking to conceal it from regulators, clients, investors and, presumably, its own chief executive.
The incompetence defense is certainly plausible. Being a Senator requires no particular management expertise, as our President demonstrates daily, and Corzine’s tenure as New Jersey’s Chief Executive was disastrous enough to ruin what once had been a decent political reputation.
His prior experience as a Goldman Sachs executive suggests that he might have learned to be more scrupulous about following the law and meeting fiduciary obligations to clients. But a firm of that size likely delegates such technicalities to lesser lights, who are paid to keep the firm out of legal trouble but whose warnings are not always heeded. Corzine laid bare his contempt for such people when he sacked his Chief Risk Officer and later referred to his Global Treasurer as the “Gravedigger,” even as Corzine himself dug the firm’s grave. Compliance officers don’t become Wall Street CEOs; risk-takers do. Those who bet big where others shrink back out of prudence or fear make fortunes for people at the top. And when they bet wrong, somebody else often cleans up the mess.
That somebody else is often the government, particularly when the bank is, in the language of the Dodd-Frank banking “reform” law, “systemically important.” The relationship between big government and Wall Street giants, though sometimes superficially adversarial, is generally quite cozy, regardless of which political party is in charge. Five years after Wall Street’s most recent meltdown, crony capitalism thrives. The President flatters the middle class with rhetoric about its importance, even as it wastes away on his watch. He has never uttered a word, to my knowledge, to note (much less protest) that the Federal Reserve’s unprecedented monetary policy has enriched investors while leaving behind those whose standard of living depends on their own labor. His apparent willingness to appoint Janet Yellen, who has been instrumental in shaping this monetary policy, as the next Fed Chairman suggests that he is more comfortable than he lets on with growing inequality.
The Corzine case seems unusual even when one acknowledges the close relationship between the investor class and the governing class. There is nothing terribly complicated about it. Its core facts are clear: MF Global stole nearly $1 billion of its clients’ money in a failed attempt to cover its chief executive’s disastrous bets.
To a naïf like me, that suggests criminality and guilt. But prosecutors at the Justice Department despaired of mounting a criminal case and the CFTC may not prevail in its civil action. Perhaps this is just too complicated for a simple man like me to understand. Perhaps Jon Corzine is no poster child for crony capitalism, but a genuinely innocent man caught by happenstance in an unfortunate situation. Failure, even one as spectacular as Corzine’s, is no crime.
Still, I can’t shake the notion that something else might be at work here. Could it be that the political class can’t bring itself to accuse one of its own of a crime?