You can take the the CEO out of Goldman Sachs (GS), but you can't take Goldman out of the CEO. What else explains how MF Global chief Jon Corzine, who also once headed everybody's favorite Wall Street casino, managed to lead a 230-year-old brokerage firm into bankruptcy in less than 18 months?
After taking the helm at MF Global in March, 2010, Corzine immediately set out to transform the ailing firm, which specializes in handling commodities and derivatives trades, into an investment bank. Translation: He wanted the firm to learn how to roll the dice. That was no surprise, given his reputation as a risk-taker during his time running Goldman's fixed-income division in the 1990s. And here is the strategy Corzine settled on at his new employer:
MF Global began buying the debt of European countries like Italy, Portugal, Spain and Ireland last year, in a bet that the discounted prices of those bonds would soon recover. Its gamble, though, went sour, suffering as Greece's troubled economy spread woes across the Continent.Corzine didn't waste any time upping the stakes at MF Global. Even as the sovereign debt-crisis spread across the eurozone, the firm's exposure to debt in Portugal, Ireland and other troubled economies in the region rose to more than $6 billion. That amounted to some five times MF Global's tangible common equity, a measure of a company's ability to withstand financial losses. By comparison, the much larger Morgan Stanley (MS) has roughly $2 billion tied up in these countries.
When its leveraged bets on Europe blew up, so did MF Global. The firm lost more than $186 million in the second quarter, its biggest loss ever. Corzine scrambled to find a buyer, but the damage was done. The coup de grace was Moody's (MCO) moving last week to downgrade the firm's debt rating to "junk" status.
No industry rewards incompetence -- and risk -- like financial services. In 2010, a year when profits on Wall Street fell by more than half, the average annual salary for securities industry workers in New York City rose 16 percent, to more than $361,000. And of course extravagant bonuses were the rule at big banks in the years leading up to the financial crisis.
There is no mystery why that is. To this day, bankers and traders are rewarded for taking reckless chances with other people's money, including shareholders and taxpayers. As CEO at MF Global, Corzine appears to have led the way in rewiring the firm's corporate culture to emulate companies like Goldman. As one ex-MF Global employee tells Reuters about Corzine's changes at the company:
"He basically told us that it was up to us to drive the profits of the firm," said a former MF Global trader who was in the room....Except this time Corzine was operating without a net -- unlike Goldman, MF Global isn't too big to fail.
In interviews with more than a dozen former employees and competitors, a portrait emerges of Corzine struggling to transform the firm by ramping up risk.
Money for nothing
MF Global's meltdown is another textbook case (if we needed another) of the perils of financial speculation. The firm's collapse, along with the bailout this month of Franco-Belgian bank Dexia, is also stoking fears that the financial contagion devastating Europe is now spreading to the U.S. Yet there is another lesson here about the alleged value of "superstar" CEOs.
MF Global naturally trumpeted Corzine's hiring, highlighting his leadership in making Goldman more profitable and his experience as the former governor of New Jersey. What the company didn't say was that his approach to boosting profits at the investment bank had caused major losses.
Still, the brokerage firm was so eager to keep him on board that in August it promised a bigger payout to investors should Corzine quit the company for a job in the Obama administration. As it turns out, MF Global might have been better off sending him packing. When the dust clears, the firm is likely to rank among the 10 largest bankruptcies in U.S. history.
Image courtesty of Flickr user Tony the Misfit via Wikimedia Commons, CC 2.0