MF Global and As Luck Would Have It

Veteran Bilderberger Jon Corzine announced his resignation earlier today as CEO of the international mega-firm MF Global, just 4 days after the massive derivatives brokerage filed for Chapter 11 bankruptcy.

The court documents filed in Manhattan listed the firm’s assets at a staggering 41 billion dollars, higher than the combined GDP of Madagascar, Iceland and Bolivia, but on Halloween day the markets abandoned the former darling of Wall Street sending its stock plummeting 79% on top of further losses the stock had seen in days prior.

So what happened? How did this financial juggernaut collapse in a matter of days?

As so often happens, the man behind this disaster has a nearly impeccable pedigree.  Jon Corzine is a former marine who obtained the rank of sergeant before being accepted to the MBA program at the University of Chicago. After working for a series of Midwestern banks, he moved to New Jersey to become a bond trader for Goldman Sachs.

While at Goldman, his aggressive style fueled his rise to Chairman and CEO of the then private partnership. While at the head of Goldman, Corzine was appointed to several special government committees and enjoyed the intimate company of some of the government’s most powerful figures including President Clinton.

While an eventual power struggle left Corzine to surrender his position as CEO of Goldman to eventual treasury secretary Henry Paulson, when Goldman Sachs went public after his departure Corzine pocketed a cool $400 million from the IPO.

Following his time at Goldman, Corzine went into politics, picking up a New Jersey seat in the U.S. Senate in the 2000 election. Five years later, Corzine became the governor of New Jersey.

In 2010 he was appointed as CEO and Chairman of MF Global, a firm that enjoyed a seat at the inner circle of the brokerage elite.

But something began to run afoul sometime this year when what many blame as mismanagement caused the firm’s debt to capital ratio to become unsustainable. Last Monday, the rating agency Moody’s downgraded the firm’s credit profile. The next day, encumbered with debt and bad bonds as a result of exposure to the European debt crisis, the firm announced a $186 million loss for the quarter. Two days later, Moody’s again slashed the firm’s credit rating, this time into junk territory, as did Fitch. Regulators have claimed that they had been pressing the firm that it needed to raise capital for months but were only met with disinterest and hubris from the boardroom titans who had jockeyed their way to the helm of the Wall Street powerhouse.

The real drama came last weekend, when in the halls of what had been one of the most revered brokerage firms in the world just weeks earlier, top executives, including Corzine, planned one last ditch effort to save MF Global: frantically trying to organize a shotgun merger with anyone who wanted a piece of the company. The idea was to get some sort of agreement finalized before the markets opened on Monday, hoping that it would quell the wary investors that had been pummeling the stock the week before.

For a brief time, it looked like a miracle would happen. There were some who showed a great interest in the firm’s highly regarded brokerage business, which had historically been one of the most profitable operations of its kind.

Some have said that informal agreements had already been reached, when a sudden revelation came to light as analysts and attorneys combed over MF Global’s books, trying to understand the firm’s complex financials. At 1:45 Monday morning, just hours before the markets would open, they told Corzine there was a big problem.

A huge chunk of client money seemed to have just disappeared. About $630 million total had seemingly vanished from the firm’s balance sheet. Money that did not belong to the firm, but clients who had trusted MF Global with managing their capital. This stopped the negotiations dead in their tracks. The potential buyers walked away and the massive international brokerage firm was out of time.

When the market’s opened, the stock collapsed and the firm filed for bankruptcy, but the federal investigation was just beginning to really heat up. The FBI and SEC began to try to piece together the events at MF Global. Where had the money gone? How did a sophisticated financial institution simply lose track of over a half billion dollars? Firms sometimes make bad trades, but when they do, those firms know what happened to the money. This was different.

One exchange on which MF Global executed its trades suggested that sometime last week the firm made a series of money transfers “in a manner that may have been designed to avoid detection,” which some took as confirmation of fraud and criminal wrongdoing.

Of course the firm maintained that it had not violated any securities laws, but this rang hollow to many as Jon Corzine hired Andrew Levander, a leading white-collar criminal defense lawyer and began to brace for what was to come. People began to compare Corzine to the likes of Raj Rajaratnam or Bernie Madoff and started to point out the irony of Mr. Corzine sponsoring 401(k) reforms in congress after the Enron scandal obliterated the retirement portfolios of its employees.

The day after the bankruptcy filing, the Associated Press broke the story that Corzine had allegedly admitted to illegally using client funds to save the company as MF Global’s financial situation spun out of control.

A Deus ex machina is a plot device wherein a seemingly irresolvable dilemma in the storyline is abruptly solved by the unexpected intervention of some entirely new event or character, such as the protagonist waking up to realize that what happened previously was all just a dream, or when some forgotten character appears to save the hero just as their demise seems certain.

This sort of plot device is usually criticized as showing a lack of creativity or continuity within a story. Nietzsche wrote that the deus ex machina began to replace the powerful and often unhappy endings of Greek theatre with a more comforting sense of resolution that led to the death of Greek tragedy.

If life imitates art, I’m not sure if the events of earlier today are much better than Mr. Corzine being woken up and told that the past week was just an awful dream.

Just hours ago, Bloomberg reported that the missing money had been found! In a forgotten JP Morgan account! Oh joyous day!

Mr. Corzine must be kicking himself now. How could he have been so silly as to have forgotten about the 2.2 billion dollar account that for some reason contained both the firm’s own money as well as the missing clients’ money (which is in violation of securities law) and for some reason was completely omitted from the financial documents that were shown to potential buyers over the weekend?

What a crazy misunderstanding. It a good thing that Corzine’s buddy Jamie Dimon caught the goof and saved him from some potentially serious criminal charges. Of course, JP Morgan officially denies knowing if the money they happened to have found is the exact same money that is missing.  The implications of that knowledge would be quite illegal, so who can blame them? But people close to the matter have already leaked that the notice of the money magically appearing into the account was sent to MF Global directly from JP Morgan.

Not to mention the fact that $630 million in client funds going missing from MF Global and $659 million in mysterious client funds being found in the JP Morgan account doesn’t make this an especially difficult connection to make.

Who knows what Corzine offered Dimon or JP Morgan for ‘finding’ the money in this ‘forgotten’ account. We’ll probably never know, but apparently, when you’re the CEO of Goldman Sachs, then a U.S. senator, then Governor of New Jersey, then the CEO of a major international brokerage firm, things just have a way of working themselves out in the end.