Well, this one’s right up there with the most spectacular CEO disasters ever.Yesterday, 18 months after Jon Corzine took over the helm of MF Global with the goal of building it into a real investment bank, he flew the company into a mountain.
Because part of becoming a real investment bank, apparently, is betting the company.
Jon Corzine bellied up to the global market tables, bet MF Global, and lost.
Specifically, the former head of Goldman Sachs and governor of New Jersey authorised his traders to scarf up $6 billion in bonds issued by Spain, Italy, Portugal, Belgium, and Ireland. The bet, presumably, was that the powers-that-be in Europe would bail out these and other bondholders to the tune of 100 cents on the dollar, because in our global bailout spree, that’s what powers-that-be do.
Suddenly the powers-that-be decided to force Greek bondholders to take a 50% haircut on Greek debt, which increased the risk that bondholders for Spain, Italy, Portugal, and other basket-case countries might actually be held accountable for their idiotic loans, too.
And when MF Global customers saw that Corzine’s traders had bet the firm and lost, they ran away screaming.
And even Moody’s freaked out.
And that was it, poof. No more MF Global.
As we noted yesterday, Jon Corzine, the pilot who took over the MF Global plane and flew it into a mountain, contractually has the right to a $12 million golden parachute, which would presumably go a ways toward easing his regrets. We hope that, for decency’s sake, he waives it.
If he doesn’t waive it, he can get in a long line of creditors including CNBC, from which Corzine’s MF Global bought (and didn’t pay for) some $845,000 of advertising. And, hopefully, if there’s any justice in the world, Corzine will be at the end of that line.
Because he really shouldn’t get a cent.
What happened to MF Global on Corzine’s watch was not just incompetence. It was spectacular recklessness. It was the equivalent of aiming a 747 filled with people straight at the side of a mountain and hoping that, just before you smash into it, the prevailing winds will shift and enable you to pull up.
And it’s not as if Corzine didn’t know the mountain was there.
All of the Wall Street CEOs who bet their firms in the years leading up to the financial crisis — most of which were then saved at the 11th hour by the government — at least had the excuse that they had never seen markets crash like that.
Jon Corzine had seen markets crash like that.
In fact, he had just seen markets crash like that. Just three short years ago. Along with everyone else on the planet who was not in a coma during the financial crisis.
And yet the first thing pilot Jon Corzine did when he took over the controls of MF Global was aim it straight at the mountain!
Given this, we have only one question for Corzine:
What the fuck were you thinking?
(Apologies for the language. But given that Corzine just blew up a huge company, we think it’s warranted. And so, again…)
What the fuck were you thinking?!
If the financial crisis didn’t alert you to the hazards of betting your company and putting all that money and all those jobs at risk, what on earth would have?
Given that regulators are already crawling all over MF Global looking for missing customer funds, we assume Jon Corzine will not be able to answer that question in a timely fashion. We also assume that, when he does answer it, in a half-century, when all the litigation is finished, he’ll blame a thousand-year-flood or some other impossible-to-foresee act of God.
And this will be just as preposterous and dumbfounding an excuse as it was all the other times CEOs have blamed thousand-year-floods for their stupidity and recklessness. (It used to be that, on Wall Street, 1000-year floods came every 10 years. Now, it seems, they come every 2-3 years).
In Corzine’s case, the excuse will be even more dumbfounding.
For the past three years, Europe has been a slow-motion train-wreck. And although it may have seemed a certainty to Corzine and his traders that the idiots who lent money to Spain, Portugal, et al, would get the same 100-cents-on-the-dollar bailout that the idiots who lent money to U.S. banks got, there was always a chance that they wouldn’t. And Corzine and his traders obviously knew that.And that brings us to the real reason Corzine and his traders bet the firm:
Because it was in their personal interests to do so.
Corzine and his traders, we imagine, put the odds that Italy, Spain, et al, would get bailed out at, say, 90%, and the odds that they wouldn’t get bailed out at 10%.
And, presumably, the $6 billion of bonds Corzine and his traders loaded up on were priced as if there was only, say, a 60% probability that those countries would get bailed out.
So Corzine and his traders saw a marvellous opportunity to coin money and become a real investment bank:
- The odds were 90% that they would cash in big.
- And only 10% that they would fly the firm into a mountain.
And thanks to the fact that Corzine and his traders really had no huge personal downside other than forgoing a bonus for a year or two and the hassle of finding new jobs, they presumably concluded that these odds were spectacularly in their favour.
Nine times out of 10, they would win big and take home a boatload of cash.
One time out of 10, they would… well, carpe diem!
Someday, perhaps, the shareholders of Wall Street firms will wake up and realise that it’s better to make less money this year and be here next year than it is to continuously bet the firm into order to make more money now. But until those shareholders wake up and incent the people they hire to manage their firms, to actually manage them that way, though, nothing will change.
When you give gamblers all of the upside and very little of the downside, it should be no surprise that they keep betting their firms.
If there’s any good news here, it’s that the government didn’t freak out and bail MF Global out. Shareholders actually don’t like losing everything. And, eventually, if they keep losing everything again and again and again, they’ll finally begin to wake up.
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