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The unlearned lessons in MF Global’s fall

Marketplace Contributor May 1, 2012

The unlearned lessons in MF Global’s fall

Marketplace Contributor May 1, 2012

Kai Ryssdal: The roster of companies made famous — or infamous, I guess — in the financial crisis is pretty well established: Bear Stearns; Lehman Brothers; AIG. Big names that collapsed in the heat of the moment.

Then along came a company called MF Global. It used to be a sleepy brokerage firm. It dealt mostly with things like corn futures and pork bellies. Until Jon Corzine took over as CEO. Corzine was a star on Wall Street 20 years ago, but with the financial crisis still fresh, MF Global under Corzine’s leadership failed spectacularly.

An investigation into MF Global by Frontline — part of its current series “Money, Power, and Wall Street” — finds lessons unlearned about the continuing dangers of the revolving door between politics and finance. In a segment of tonight’s broadcast produced for Marketplace, Frontline correspondent Martin Smith has the story.

Martin Smith: When Jon Corzine came to MF Global in 2010, he was a towering figure: He had been a marine, senator, governor, one of Wall Street’s top bankers and a man on the shortlist to replace Treasury Secretary Timothy Geithner.

Here’s Vice President Joe Biden in 2009.

Joe Biden: When Barack Obama and I were literally sitting at a desk in a high-rise in Chicago beginning to plan how we would try to get this economy out a ditch, literally, the first guy I called was John Corzine.

But Corzine also came with baggage. He had lost his bid for re-election as governor of New Jersey; and years earlier, he had been forced out of the leadership of Goldman Sachs. There was unfinished business.

William Cohan: He wanted to come back to Wall Street and prove that his partners had been wrong about getting rid of him at Goldman Sachs.

William Cohan is a contributing editor at Vanity Fair, and interviewed Corzine for his book, “Money and Power.”

Cohan: He was going to bring in a new team. They weren’t taking enough risk, he told me. So he was swingin’ from the fences from day one.

For a struggling firm like MF Global, it was a big morale booster.

Rich Iliczyszyn: I was sipping the Kool-Aid at that time.

Rich Iliczyszyn was a trader with MF Global. He welcomed Corzine’s high profile and clout.

Iliczyszyn: Especially with the climate — with regulation, everything — my first inclination is, he’s going to have political connections. This is going to be great for the company, you know.

To turn MF Global around fast, Corzine decided to take the firm’s money and make a big bet on sovereign debt from Italy, Portugal, Ireland and Spain. They were derivative deals — which, thanks to an accounting trick, allowed MF Global to book profits immediately. But the newfound health was an illusion.

None of this was disclosed to MF Global’s customers, many of whom were from Main Street. Steve Meyers, owner of Grainbelt Commodities, used MF Global to trade futures on behalf of scores of farmers and ranchers in the Midwest.

Steve Meyers: I never knew before that they could invest money in overseas, in markets or sovereign debt. Had I known that, I would have pulled out immediately.

Corzine was also leveraging his bets by borrowing money from MF Global’s customer deposits to fund trades for the firm’s own account, something called internal repo. At the same time, regulators were looking hard at this practice. During the summer of 2011, the Commodity Futures Trading Commission, the CFTC, was debating whether to ban internal repo transactions. Corzine went straight at the regulators, meeting with the commissioners on two different occasions.

Bart Chilton: He’s an impressive man. And he made a good case. And when he told me that we were making a big mistake, it certainly put some doubt into my mind.

Bart Chilton is a CFTC commissioner. He says Corzine was persuasive.

Chilton: He was one of the more prominent individuals who came in and told us that we had gotten it wrong and shouldn’t do what we had suggested in our proposal. And that they were doing everything appropriate with regard to these internal repos.

The regulators backed off.

By August of 2011, MF Global had amassed $6 billion worth of bets on European debt. The company’s board was so alarmed at the internal borrowing that it ordered Corzine to halt the European trades.

But another regulator, FINRA, was on to MF Global. Its concerns about Corzine’s $6 billion bet spilled into public sight after the company reported a big quarterly loss. Worried that Europe would default on its bonds, MF Global investors panicked.

The collapse was rapid. Unable to find a buyer, MF Global filed for bankruptcy protection last October.

Chilton: This is a big bucket full of cold water in regulators’ face.

CFTC Commissioner Bart Chilton.

Chilton: It’s a wake-up call that says, “You’ve got to take a fresh look at what’s going on in the markets. You’ve got to better protect — for customers’ interests.”

The CFTC has since banned internal repos.

The MF Global affair is still being resolved. One of the issues Corzine has had to answer for: what happened to $1.2 billion in customer money that went missing in the company’s final days? Some still hasn’t been found.

For Frontline and Marketplace, I’m Martin Smith.

Ryssdal: The concluding episode of Frontline’s “Money, Power and Wall Street” airs tonight on PBS.

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