Zero Hedge
0
All posts from Zero Hedge
Zero Hedge in Zero Hedge,

A Close Encounter With Jon Corzine

Submitted by Erico Matias Tavares of Sinclair & Co.

A Close Encounter With Jon Corzine

We got caught in the MF Global debacle as a client of their UK subsidiary. Little did we know at the time that our view of the financial markets would change forever - as a result of faulty regulations and, above all, faulty bosses.

* * *

MF Global Goes Bust

Jon Corzine had an illustrious career in investment banking, rising to the very top of Goldman Sachs, until he got pushed out in 1999. He subsequently decided to try his luck in politics, and was eventually elected as a Senator from New Jersey in 2001, then Governor in 2006.

After losing to Chris Christie in 2010, Corzine was promptly hired as the CEO of MF Global. He was back in the game of finance - and with something to prove. While the majority of voters in New Jersey breathed a sigh of relief, the clients of MF Global could not imagine the disaster that would unfold.

And it did not take long. Corzine’s idea was to turn an annuity-like brokerage business into a high flying investment bank (complete, it seems, with its own proprietary trading desk). When the firm’s US$7 billion highly leveraged bet on risky Eurozone bonds turned sour in 2011, MF Global eventually ran out of funds to meet margin calls. What followed was the US$40 billion bankruptcy of a firm that traced its roots all the way back to the 18th century Britain – after just a year and a half under Corzine’s leadership.

According to internal reports, the last days of MF Global in October 2011 were chaotic. Somehow in the scramble to raise money to meet the margin calls, US$1.2 billion of client funds were lost (or “vaporized”, as it was later described). The plight of many clients around the world, including us, was just about to start.

MFGUK Clients

In the UK, it took a few months before we could get a glimpse of what was actually going on. The first client meeting was only held in January 2012. KPMG, the administrator of the UK assets of the firm, informed us that there was a shortfall in client funds and that there was no certainty that it could be covered. At that point you could hear a pin drop across the room.

And it got worse from there. As fate would have it, by default new brokerage accounts in the UK were not segregated from the firm’s pool unless the clients specifically chose so. It turns out not many did. Many people were outraged or in tears when they learned about this, because being segregated or not meant that you were either at the front or at the back of the creditors’ queue, respectively. With segregated funds facing the risk of a write-off, being towards the back was not particularly encouraging, to say the least.

With the help of others we then decided to form MFGUK Clients, an action group intended to help other clients get timely information about the bankruptcy process, provide the contacts of funds which had volunteered to buy client claims and alert the public in general about the risks of having a brokerage account in the UK. Our plight would not be in vain!

In the process we learned a great deal about UK brokerage regulations; and got a glimpse into the world of rehypothecation: basically a prime broker’s ability to use client collateral for its own funding purposes, a practice that while capped in the US is – unbelievably – unlimited in London.

Suddenly, the choice of having funds domiciled in London did not seem all that smart, especially when we looked at what was going on elsewhere.

Benchmarking a Client Debacle

Here we had a major brokerage firm going bust across several jurisdictions concurrently. So we could see how London was faring compared to other jurisdictions in real time. And this only added to our frustration and dismay.

The Canadians got 100% of their money back a few short weeks after the firm went under. The Singaporeans received over 90% soon after. In the US, whence Corzine was orchestrating its financial gambles, clients got 72% back much before yearend, as well as considerable prime time coverage across the financial networks.

And in the UK? The new rules enacted by the Financial Services Authority (“FSA”) to streamline client payout procedures in brokers bankruptcies (particularly after Lehman Brothers UK, another debacle that was still festering in the courts at the time) turned out to be next to useless, and it would be many months before segregated clients got a paltry 26% of total. All others would have to sit back and wait to access financial insurance – which in the UK is limited to GBP 50,000 (~US$80,000) per claim.

Confronted with these events, we put together the following sketch to summarize the general feeling amongst UK clients (getting screwed by a bankster can be a source of inspiration):

However, we soon learned that there was a group faring even worse than us: the Australians. While UK clients got some information and updates on the process, status of the payouts and so forth, for the longest time these guys had no visibility whatsoever. No matter how depressed we felt about the whole thing, they really got the raw end of the deal [and we never found out if they ever got all their money back].

A Close Encounter

Meanwhile, Corzine was nowhere to be found. He had pretty much retreated from public view after his testimony before the US Congress. So we had all these unanswered questions and emotions bottled up for months, with no redress in sight. And that’s when a rather surreal event took place.

Exactly two years ago we decided to visit the Matisse exhibition at the Metropolitan Museum in New York City. Here’s what we wrote to other UK clients later that night:

“Tonight a friend and I decided to go see the Matisse exhibition during the late night session at the Met. We got there late and had to rush in to have enough time to enjoy some of the finest paintings ever produced by Mankind.

As we got closer to the end, I found myself standing next to someone I had never met, but whom nevertheless felt very familiar to me. Then it struck me who he was. I turned to my friend in disbelief. We both took a step back, looked again at the person, then at each other once more. It had to be him. We were standing next to Jon Corzine.

My heart immediately started racing. Suddenly all those repressed sentiments were turning loose, though I could still not entirely believe that the man who caused so much misery to thousands of people around the globe was standing right there. In the flesh. Carefree, enjoying the wonderful art around him guided by his headsets.

I started to think about what to do next. Should I make a huge scene? Or should I just forget about it, now that the administrators indicate that we will get most if not all of our money back? No. I just could not let it slide.

I decided to wait for him at the exit. My friend moved away, not entirely sure about what was about to happen. Then he got out, put down his headsets and looked out into where I was standing. This was my chance.

“Mr. Corzine?”, I calmly asked. “Yes!”, as he immediately reached out for my hand. I said, “I am a client of MF Global. How do you feel about that?”

His eyes turned down as he began muttering some pavlovian remarks. The few things he said that stuck were “I’m sorry”… “I’m being sued”… “there will be losses”… Then he said people are getting their money back. At that point I replied, “My money is in the UK, most of us got nothing back. Many people are struggling.” More remarks followed: “bad regulations in the UK”… “there will be losses”… “I’m being sued”…

That is all I had for him. Did not want to dignify him by displaying any emotions. The courts will not criminally judge him for what he did. But he knows that the anonymous person in the crowd will. Anytime, anywhere.

As surreal as this experience was, I was feeling a strange sense of atonement. In the end we are all human. But some are more human than others.”

Fortunately we managed to prevent all those repressed sentiments from turning rather more aggressive, which would have certainly landed us in jail – the only ones in this whole debacle, it is worth noting.

Post Mortem

Probably someone should write a book about Corzine and MF Global (not us – we’ve had it!). We should all learn from it. How could this happen to a publicly-listed entity closely supervised across all the major financial centers around the world? What has been done to avoid another event like this? Who can investors turn to for redress?

Eventually all UK clients got their money back. Actually, that’s not true. Many small and medium firms who hedged their foreign exchange exposure through MF Global were forced to sell their claims at a big discount so that they could get some money back and remain in operation. For them, investor protection was just a mirage.

KPMG did a decent job in managing the whole process, in light of all the cumbersome new rules and regulations, and at one point even open disputes with their US counterparts to get some money back. The UK investors’ compensation scheme got into the action rather late primarily due to technicalities, but ended up providing a glimmer of hope for clients with smaller accounts.

All in all, we would venture to say that the UK’s reputation as a global financial center got bruised pretty badly, in large part due to its regulations. The FSA proved to be incapable of implementing a process that can repay clients quickly after a broker goes bust. And to our knowledge, the whole issue of rehypothecation and the systemic risks it poses to the financial system still needs to be addressed.

Our Commentary Published on the City AM Newspaper, 12 January 2012

Given that financial markets have short memories perhaps all of this has been already swept under the rug. It should not be. In the grand scheme of things, with all the funky business going on we have to say that we were lucky to get our money back – a full two years after the event. Investors need to be very careful when choosing to invest through a broker in a particular jurisdiction.

Ironically, as we now know, with proper money management (such as not betting the farm) and financial resources in place (such as not dipping into client funds) MF Global’s leveraged bets on sovereign bonds would have worked out. Corzine would have likely been on the front cover of every major financial magazine. Another example of the fickle nature of success in the capital markets.

As for Corzine himself… we can just hope to never have another close (or distant) encounter with him. And that’s pretty much all we have to say about him.