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November 14, 2012 at 08:36 AM
Decisions by Jon Corzine to chart a “radically different course for MF Global and try to turn the 230-year-old commodities broker into a full-service investment bank,” were the main reason the firm went bankrupt, according to a preview of a House subcommittee report released Wednesday.
Specifically, the report says, Corzine’s missteps included his insistence that “no one could challenge his decisions,” and the fact that he acted as a “de facto chief trader” and insulated his trading activities from the company’s normal risk management review process.
House Republicans’ full report, “The Collapse of MF Global,” is to be released Thursday by the House Financial Services Subcommittee on Oversight and Investigations, chaired by Randy Neugebauer, R-Texas.
“Our investigation is essentially an autopsy of how MF Global came to its ultimate demise and what can be done to prevent similar customer losses in the future,” Neugebauer said in the release announcing some of the report’s key findings.
As the release notes, Corzine, a former co-chairman of Goldman Sachs who later became a U.S. senator and governor of New Jersey, resigned from MF Global on Nov. 4, 2011, almost 20 months after becoming the firm’s chairman and CEO. The brokerage had declared bankruptcy four days earlier and its collapse revealed a $1.6 billion shortfall in customer funds.
“Choices made by Jon Corzine during his tenure as chairman and CEO sealed MF Global’s fate,” Neugebauer stated. “Farmers, ranchers and other customers may never get back over $1 billion of their money as a result of his decisions. Corzine dramatically changed MF Global’s business model without fully understanding the risks associated with such a radical transformation.”
The subcommittee’s staff investigation of MF Global involved three hearings, more than 50 witness interviews, and the review of more than 243,000 documents obtained from MF Global, its former employees, federal regulators and other sources.
“By expanding MF Global into new business lines without first returning its core commodities business to profitability, Corzine ensured that the company would face enormous resource demands and exposed it to new risks that it was ill-equipped to handle,” the subcommittee report states.
In order to generate the revenue needed to fund MF Global’s transformation, Corzine invested heavily in the sovereign debt of struggling European countries, the report states. These investments, which carried enormous default and liquidity risks, were a “prime focus” of Corzine’s attention and he failed to develop a corporate strategy for managing the risks, the subcommittee majority staff found.
Authoritarian Atmosphere
Corzine also created an “authoritarian atmosphere” at the firm. He made “significant changes to MF Global’s senior management, including the hiring of Bradley Abelow, his former gubernatorial chief of staff, as the firm’s chief operating officer,” the report notes.
When MF Global’s chief risk officer disagreed with Corzine about the size of the company’s European bond portfolio, Corzine directed him to report to Abelow rather than to MF Global’s board of directors, the report says. “This change effectively sidelined the most senior individual charged with monitoring the company’s risks and deprived the board of an independent assessment of the risks that Corzine’s trades posed to MF Global, its shareholders and its customers.”
Corzine Insulated Trading Activity From Review Process
By acting as MF Global’s “de facto chief trader,” Corzine insulated his trading activities from the company’s normal risk management review process, which enabled him to quickly build the company’s European bond portfolio “well in excess of prudent limits without effective resistance.”
